Buying a home set to get easier as RBI cuts Repo rate by 35 points

Buying a home? Worried about the interest on your home loan EMI’s? Recent developments in the monetary policy review by the Reserve Bank of India will help you save on these home loans.

Good news home buyers

The six-member monetary policy committee (MPC), headed by RBI Governor Shaktikanta Das, decided to reduce key repo rate by 35 basis points to 5.45 per cent from 5.75 per cent, on Wednesday with immediate effect.This cut in the repo rate stands as the lowest in the past nine years, encouraging the common man towards his goal of buying a home.

Buying a home is becoming a seamless process. With the fourth cut in row, the RBI trimmed the GDP growth forecast for the current fiscal to 6.9 per cent from 7 per cent predicted previously. In January 2014, the repo rate stood at 8 per cent. Since then, it has been revised to 5.40 per cent, a reduction of 2.6 per cent. The RBI governor said in the press conference that a 25 basis points rate cut would have been inadequate while a 50 basis points rate cut would have been excessive.This cut insures that EMIs on home loans and other loans will come down significantly.

Our interactions with various stakeholders, including both public sector and private sector banks, indicate that steps are being taken by them on an ongoing basis to progressively lower their interest rates so that the benefits of the policy rate reductions are passed on to the economy,” RBI Governor Shaktikanta Das said. “We expect higher transmission of monetary policy actions and stance by the banks in the weeks and months ahead.”

But what does all this mean for the common man and his plans of buying a home? Let us take a look at the outcome of this change.

What does the monetary policy review mean to the country in general?

Any economy measures its economic activity by the gross domestic product or GDP. This could be done taking into account four avenues of cash flow.

  • Private individuals and households that spend money on consumption. This is the common man, his daily expenses and buying capacity.
  • The government and its agendas that strive to promote a stable and growing economy.
  • Private sector businesses that are investing in their productivity. These create jobs, pay the taxes that finance services and investment.
  • Net export in the country. This is the difference between the cost of imports and what they earn from exports.

All these processes in the end determine the cost of money in the country and its GDP decline or growth.

A Monetary policy helps the central bank regulate the cost of money. The central bank is mandated to decide the cost of money, commonly known as the “interest rate” in the economy.

However, dictating exact interest rates is difficult for a central bank due to various factors affecting it. The rate set by the RBI is used as a marker for the rest of the country’s economy. In other words, the EMI for buying your car or a home is determined by the RBI’s decision of the repo rate.

What is a Repo rate?

Repo rate is the interest rate at which the RBI lends money to commercial banks.

100 bps make a full percentage point. The RBI’s repo rate has now fallen 110 basis points since February.

How does a Repo rate affect the common man?

Repo and Reverse repo are short for repurchase agreements between the RBI and the commercial banks in the economy. The repo rate is the interest rate the RBI charges a commercial bank when it borrows money from the RBI. If the repo falls, all interest rates in the economy should fall, further impacting the process of buying a home.

Outcomes of the Repo rate

Immediately after, the RBI announced a drop in its Repo rate, SBI or State Bank of India which is the country’s largest lender by assets because its best interest rates on personal and home loans, introduced a reduction in its benchmark lending rates across all tenors. The bank said its MCLR or marginal cost of funds-based lending rates will be reduced by 15 basis points (0.15 per cent point), and the new rates will take effect on August 10.

Many professionals also commented on the steps taken by the RBI to try and boost the declining economy of the country. Anuj Puri, chairman, Anarock Property Consultants Pvt. Ltd, spoke about the potential of these rate cuts. He said they could stimulate borrowing in the affordable housing segment.

“While we won’t see a significant reduction in unsold inventory, affordable housing is another matter. The segment already has various incentives and being very cost-conscious, it may see a perceptible uptick. But, it all depends on how efficiently banks transmit this rate cut to actual consumers,” he said. Improving transmission remains key to the success of the latest RBI rate cut.

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