Unchanged repo rate is a festive bonanza for home and car buyers

The Reserve Bank of India kept the repo rate unchanged at 6.5 per cent for the fourth time in a row on Friday, implying stable home loan interest rates for borrowers.

Elevated food inflation and global uncertainties notwithstanding, the Reserve Bank of India expectedly kept the policy rates paused in its monetary policy review for October. With this the repo rate, remains paused at 6.50 since February 2023.The RBI’s view is that developed economies are nearing a peaking of rates.

The unchanged repo rate is a festive bonanza for homebuyers and gives them yet another opportunity to make cost-optimized home purchases. 

"If we consider the present trends, the overall consumer market looks bullish across sectors, particularly the automobile and housing markets, which in many ways reflect the health of the economy. We are entering the festive quarter with a very strong momentum in housing sales, and unchanged interest rates will act as a major catalyst for growth in the residential market," said  Anuj Puri, Chairman, ANAROCK Group.

As per ANAROCK Research, housing sales across the top 7 cities created a new peak in Q3 2023 (despite the usually slow monsoon quarter) and stood at 1,20,280 units as against over 88,230 units sold in Q3 2022, thus recording 36% yearly growth. 

"This stability fosters confident financial planning, reducing uncertainties about interest rates and hasty refinancing decisions. The trajectory of the home loan market in the forthcoming year hinges on economic dynamics and consumer sentiment. If rate stability persists and the economy maintains its positive momentum, we may witness a surge in home loan applications, especially towards year-end, further fueled by the festive season," said Kaushik Mehta, Founder & CEO of RUloans Distribution.

Similarly, the stable rate environment is poised to invigorate  the car loan market too. " We can anticipate a rise in car loan applications, buoyed by favorable lending conditions and heightened demand during the festive season," said Mehta.

What does it mean for retail investors?

 RBI will likely wait and watch for the next couple of quarters before it decides to reduce the interest rates.
 

From retail investors' standpoint, we are almost at the peak of the interest rate hike cycle. " Over the next 3-6 months, retail investors should lock their funds in long-term fixed deposits at higher interest rates. Depending on the goal and timeframe of their investment, they can stagger this investment into a few smaller FDs across different commercial and small finance banks, as well as NBFCs," said Anshul Gupta, Co-Founder and Chief Investment Officer, Wint Wealth 

On the other hand, bond markets have already been discounting rate cuts, and 10-year G-Sec yields are down by 30 bps from this year’s peak levels.

"Home loan borrowers would do well to stick to their floating interest rate loans for now, even if fixed-rate loans are available at some discount," said Gupta.

How to manage household finances, according to Adhil Shetty of Bankbazaar

Fixed Deposits: While interest rates remain elevated, 2023 remains a good time for depositors—especially senior citizens—to lock into elevated rates for the long-term. Several banks now offer 7-8% on long-term tenors. Senior and super-senior citizens will find 50-75 bps more to lock in to. 
 

Home Loans: Homebuyers will welcome the pause on the repo rate though they would also hope for a rate cut soon. When the central bank keeps the repo rate steady, it results in a sustained period of unchanged or relatively stable rates. This consistency aids prospective homebuyers in planning their finances and commitments. Those looking to purchase properties or refinance existing home loans can find this decision favourable. 
 

Securities Markets: In the governor’s speech today, we have seen cautious optimism for the future. The food inflation spike in July has been followed by a softening of prices. The global economy is also looking at the United States to see where they take interest rates. The consensus is that things are difficult now, but 2024 could be much better as and when interest rates start to fall. This would have a positive impact on both stock markets and bond markets.

Impact on markets 

The RBI's decision to maintain the status quo in its policy has been received positively by the market, despite growing concerns about rising inflation on a global scale. The Sensex gained 0.5 per cent to trade at 65959.75 while Nifty was up 0.36 per cent at 19616.80 at 11 am.

"Nevertheless, the impact of this decision is expected to be limited, as the market's attention is anticipated to shift towards global market dynamics, notably the dollar index and US bond yields. Technically speaking, Nifty has managed to surpass the 50-day moving average (DMA), suggesting potential for a further recovery towards the 20-DMA level of 19,800. However, a significant bullish momentum is projected to materialize only upon breaching the 19,800 mark," said Santosh Meena, Head of Research, Swastika Investmart Ltd.