The Monetary Policy Committee of RBI has today reduced the repo rate by 25 basis points to 5.25 percent, due to which home loan rates are expected to fall significantly. It is believed that home loan rates will return to the level before the global financial crisis of 2008. Many banks like Union Bank, Bank of India, Bank of Maharashtra and Indian Overseas Bank are already offering home loans at 7.35 percent. With the reduction in repo rate, the interest rate is expected to fall to 7.1 percent. Based on this, a 0.25% rate reduction on a ₹1 crore home loan for 15 years would reduce the EMI by approximately ₹1,440 per month.
Deposit rates will have to be reduced
Bankers say to offer home loans to new borrowers at 7.1%, lenders will have to significantly reduce deposit rates or adjust the spread over the benchmark rate. If this happens, new borrowers may have to pay higher interest rates than existing floating-rate borrowers.
Unless deposit rates come down, banks’ net interest margins will be squeezed, while non-banking finance companies will immediately benefit from lower funding costs. “For the NBFC sector, and especially for last-mile financiers like Shriram Finance, this policy is very helpful. The continued neutral stance along with the announcement of OMO purchases of ₹1 lakh crore ensures that liquidity remains plentiful.”
What do experts say?
Ankur Jalan, CEO of Golden Growth Fund, says that from the depositors’ point of view, the 25 bps reduction in repo rate will raise concerns about decline in returns on fixed deposits and other interest-bearing savings. Additionally, it may force banks to reduce deposit rates in the coming months, making it difficult for savers to earn good returns. While low interest rates may broadly support economic growth, wealthy investors and family offices often deploy capital into higher-yielding products such as real estate-focused Category II AIFs to maintain real returns, increasing the pace of fund raising for these funds.
The low interest rate environment also reduces the cost of capital for developers and strengthens project feasibility, which in turn increases opportunities for AIFs. Preksha Singh, CEO, Agrasheel Infratech, said that India’s real estate market is already a big attraction for global investors and the NRI community. Now, with the reduction in interest rates, investments will become even more profitable. A stable economy, growing demand, and low EMIs will together make India the best investment destination in the next few quarters.
