Mint Primer: Why the RBI rate cut won’t help revive budget housing

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Subscribe to enjoy similar stories. Affordable housing, the weakest link in the current real estate boom, may get a shot in the arm with the Reserve Bank of India’s (RBI) rate cut last week. However, for a meaningful impact, there needs to be another round of rate cuts and more.

Mint explains why: In the first rate cut in five years, the RBI on Friday slashed the repo rate by 25 basis points, taking the policy rate to 6.25%. The repo rate is the interest rate at which commercial banks borrow from the central bank. Home loan borrowers, who have taken floating-rate loans, would see their equated monthly instalments (EMIs) reduce when the benefit of a lower repo rate is passed on to consumers.

This may be fully realized in the next three to six months, though it will begin to accrue immediately. The reduction in the benchmark rate is seen as the start of a rate-cut cycle. Also read | RBI’s first rate cut in five years is small but can be effective It is a positive step.

Reduced home loan rates can lift the overall sentiment. First-time homebuyers, who have been sitting on the fence due to high property prices and loan rates, may consider taking the plunge now, with lending rates expected to come down slightly, as long as banks pass on the benefit to the buyers in a timely manner. That said, the rate cut may be less effective due to rising property prices and high inflation.

RBI’s decision to reduce the benchmark repo rate by 25 basis points also piggybacks on the recent taxation benefits announced in the Union Budget. Record-breaking home sales in the last three years left out budget housing. The share of affordable homes, priced ₹40 lakh and below, in total sales has been steadily shrinking post pandemic.