Will Home Loans Get Cheaper During General Elections

Mar 27, 2024 / Reading Time: Approx. 5 mins

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Will Home Loans Get Cheaper During General Elections

The question of whether the home loan interest rates will dip or rise during general elections in India is a matter of keen interest for borrowers as well as financial experts. Despite the anticipation surrounding potential Repo Rate cuts in 2024, the Reserve Bank of India (RBI) maintained a stance of stability during its first Monitory Policy Committee (MPC) meeting, which commenced on February 06, 2024.

Hence, home loan borrowers eagerly expecting a Repo Rate cut are now shifting their gaze towards the upcoming bi-monthly policy meeting scheduled for April 2024 with heightened anticipation, especially considering it coincides with the time of general elections.

The term "Repo," derived from 'Repurchase Option' or 'Repurchase Agreement,' denotes the interest rate at which commercial banks borrow funds from the central bank, i.e. the Reserve Bank of India (RBI). The RBI uses the Repo Rate as a tool to regulate inflation within the country.

Unlike countries like the United States, where fixed interest rates are predominant, India has a substantial number of borrowers opting for floating interest rates. These rates, tied up to market dynamics and monetary policy decisions, can either cushion borrowers with lower EMIs or saddle them with increased financial obligations.

[Also Read: An Ultimate Guide for the First-time Home Loan Borrowers]

The allure of floating interest rates lies in their responsiveness to shifts in monetary policy. When the Reserve Bank of India (RBI) slashes the Repo Rate to stimulate economic growth or tame inflation, borrowers with variable interest rate loans often reap the benefits of reduced Equated Monthly Installments (EMIs). This dynamic flexibility can significantly ease the burden of loan repayment, offering borrowers relief in times of economic downturns or instability.

Conversely, in response to inflationary pressures in the market, the RBI increases the Repo Rate. The increased Repo Rate creates challenges for banks seeking to borrow from the central bank, leading to a reduction in the money supply in the market - a measure that helps counteract inflation. Nevertheless, the consequence is a surge in borrowing costs for banks, which contributes to an increase in interest rates for retail loans with variable interest rates.

A rise in home loan interest rates, often triggered by incremental Repo Rate hikes by the RBI, paints a different picture. As interest rates climb, so do the equated monthly instalments (EMIs), imposing a heavier financial strain on borrowers. To mitigate this burden, borrowers may opt to extend their loan tenures, thereby reducing their monthly repayment obligations. However, this extension, sometimes implemented by banks without explicit borrower consent, prolongs the duration of debt repayment, potentially encroaching into retirement years.

The Reserve Bank of India's decision-making process regarding rate cuts depends on evidence indicating the trajectory of Consumer Price Index (CPI) inflation. The decision to implement a rate cut requires majority approval from the six-member Monetary Policy Committee (MPC).

Since May 2022, the RBI has embarked on a trajectory of Repo Rate hikes, culminating in a cumulative increase of 2.5% by February 2023. This upward adjustment followed across lending institutions, requiring them to elevate their interest rates, consequently impacting the EMIs of home loan borrowers. Until the last Monetary Policy Committee meeting in February 2024, the RBI maintained the same status quo.

[Also Read: How Rate Hikes by the RBI Have Impacted Your Home Loan? Know Here...]

Table: RBI's Monetary Actions in 2019-24

Month Repo Policy Rate Policy Action (Basis Points) Monetary Policy Stance
Feb-2019 6.25% -25 Neutral
Apr-2019 6.00% -25 Neutral
Jun-2019 5.75% -25 Accommodative
Aug-2019 5.40% -35 Accommodative
Oct-2019 5.15% -25 Accommodative
Dec-2019 5.15% Status quo Accommodative
Feb-2020 5.15% Status quo Accommodative
Mar-2020 (an exceptional off-cycle meeting) 4.40% -75 Accommodative
May-2020 (an exceptional 2nd off-cycle meeting) 4.00% -40 Accommodative
Aug-2020 4.00% Status quo Accommodative
Oct-2020 4.00% Status quo Accommodative
Dec-2020 4.00% Status quo Accommodative
Feb-2020 4.00% Status quo Accommodative
April-2021 4.00% Status quo Accommodative
June-2021 4.00% Status quo Accommodative
Aug-2021 4.00% Status quo Accommodative
Oct-2021 4.00% Status quo Accommodative
Dec-2021 4.00% Status quo Accommodative
Feb-2022 4.00% Status quo Accommodative
Apr-2022 4.00% Status quo Accommodative
May-2022 (Off-cycle meeting) 4.40% +40 Accommodative
June-2022 4.90% +50 Focus on withdrawal of Accommodative stance
Aug-2022 5.40% +50 Focus on withdrawal of Accommodative stance
Sep-2022 5.90% +50 Focus on withdrawal of Accommodative stance
Dec-2022 6.25% +35 Focus on withdrawal of Accommodative stance
Feb-2023 6.50% +25 Focus on withdrawal of Accommodative stance
Apr-2023 6.50% Status quo Focus on withdrawal of Accommodative stance
Jun-2023 6.50% Status quo Focus on withdrawal of Accommodative stance
Aug-2023 6.50% Status quo Focus on withdrawal of Accommodative stance
Oct-2023 6.50% Status quo Focus on withdrawal of Accommodative stance
Dec-2023 6.50% Status quo Focus on withdrawal of Accommodative stance
Feb-2024 6.50% Status quo Focus on withdrawal of Accommodative stance
Data as of March 26, 2024
(Source: RBI Monetary Policy Statements, Data Accumulated by PersonalFN
 

While the inflation has noticeably subsided and the likelihood of a substantial resurgence seems unlikely, we must acknowledge that the current inflation remains on the higher side of the RBI's tolerance band, which is set at 2% to 6%.

Hence, while the general elections are around the corner, there is nearly no chance that the RBI will go for rate cuts, considering India's strong economic growth and elevated inflation. Many financial experts expect the RBI to cut the Repo Rate in the second half of 2024, i.e. after June-July 2024.

A significant factor behind the expectation of a steady Repo Rate is that India has been the fastest-growing economy among major economies in the fourth quarter of 2023. Undoubtedly, the government wants to continue the growth trajectory. Moreover, experts believe the government will wait for inflation to come down by a few more points as it is still on the higher side of the RBI's tolerance band.

However, on a global scale, an easing interest rate cycle is expected to commence between April and May in two major economic blocks, the USA and Europe. As you may know, China has already started easing interest rates. This may result in rate cuts of 0.5% to 1.5% in India in the second half of 2024.

[Also Read: How to Reduce Your Home Loan Interest? Here Are 7 Proven Strategies]

A Repo Rate cut, if executed, could usher in a period of relief for home loan borrowers, offering them reprieve from escalating EMIs and perhaps stimulating renewed interest in real estate investments. However, the intricacies of monetary policy and economic dynamics ensure that the trajectory of home loan interest rates remains subject to fluctuations, making it imperative for borrowers to stay vigilant and informed amidst the ever-evolving financial landscape.

Patience emerges as a virtue for home loan borrowers in the first half of 2024. The transmission mechanism adopted by lenders determines the pace at which home loan interest rates align with Repo Rate cuts. Moreover, the diverse interest rate structures governing borrowers from banks, Non-Banking Financial Companies (NBFCs), or Housing Finance Companies (HFCs) further muddle the picture, influencing the extent and timing of rate cuts.

In India's financial landscape, uncertainties abound, yet hope perseveres. The prospect of affordable home loans in India rests on the delicate balance of economic dynamics and policy interventions. While borrowers brace themselves for the twists and turns ahead, the winds of change whisper promises of relief.

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KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.


Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.
This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.



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