Last Updated:
RBI MPC Meeting December 2024: Changes in the repo rate directly affect interest rates on loans, including home loans
Home Loans in 2024: Is Stable Repo Rate a Green Signal for Floating Rates
RBI Monetary Policy December 2024: The RBI is likely to keep the benchmark interest rate unchanged for one more time in its bilateral monetary policy review later in the week as inflation has breached its upper tolerance limit and may also moderate the growth forecast given the disappointing second-quarter GDP numbers.
Impact on Homebuyers
While the decision will be closely watched for several reasons, one section who checks the RBI MPC decision is homebuyers, who aim to purchase a house on a home loan.
Impact of Repo Rate on Homebuyers
The repo rate (short for repurchase rate) is when the RBI lends money to commercial banks to meet their short-term liquidity needs. Changes in the repo rate directly affect interest rates on loans, including home loans, in India.
How Changes in Repo Rate Affect Home Loans
Higher Loan Interest Rates: Banks typically pass on the increase in borrowing costs to consumers. This results in higher interest rates on home loans (both fixed and floating).
Lower Loan Interest Rates: Banks reduce lending rates, making home loans cheaper. The reduction benefits those with floating interest rates immediately or after the next reset period.
Switching from Fixed to Floating: Is It the Right Time?
Now the question arises whether it’s the right time to switch to a floating rate from a fixed rate considering a stable repo and a chance of a rate cut in the future.
Should You Switch From Fixed To Floating Home Loan Interest Rate?
Atul Monga CEO and Co-founder of BASIC Homeloan, said “With the RBI’s repo rate remaining steady for an extended period, floating rates have pretty much stabilised, offering comparatively lower interest rates than fixed-rate loans. This makes it an attractive option for borrowers seeking to reduce their overall interest costs.”
Monga, however, highlighted that it is important to assess a few factors before making a decision.
Factors to Consider Before Switching
“First, compare the current rate difference between the fixed and floating rate loan options. Next, consider the loan tenure. Borrowers with an inter-tenure may benefit from floating rates, as potential future rate cuts could reduce their overall interest burden,” Monga said.
Availability of Options
Monga also underlined that homebuyers need to keep in mind that fixed-rate home loans are available only from select lenders. Hence, it is imperative to do thorough research in advance and understand that once you choose between a fixed or floating-rate loan, you will be committed to that rate for the duration of your loan.
The Fixed Rate Advantage
On the other hand, Monga pointed out that fixed-rate loans provide predictability and protection against future rate hikes. “Staying with fixed rates can be a better option if you prioritise stability or expect rates to rise.”
Will RBI Announce a Rate Cut Tomorrow (December 6)?
RBI Policy Date December 2024: The Reserve Bank governor-headed six-member Monetary Policy Committee (MPC) is currently underway from December 4 to 6, 2024. The decision of the rate-setting panel will be announced on December 6 by Governor Shaktikanta Das.
Why a Rate Cut is Unlikely
It was widely anticipated that the RBI would start reducing the benchmark interest rates soon but the central bank will have little option this time around as the latest print of retail inflation is above 6 per cent.
While the central bank is likely to opt for a status quo, experts say it may cut the cash reserve ratio (CRR) or tweak the proportion of deposits parked with the central bank to help with the liquidity situation.
Repo Rate Held Steady Since February 2023
The RBI has kept the repo or short-term lending rate unchanged at 6.5 per cent since February 2023 and experts think some easing could only be possible in February.
Expert Opinions on Current Repo Rate Scenario
Madan Sabnavis, Chief Economist, Bank of Baroda said given the rather uncertain global environment and the possible impact on inflation and the fact that currently inflation has been averaging close to 5.9 per cent in the last two months, a status quo on repo rate will be the logical outcome from the policy.
“There would be a change in RBI projections for both inflation and GDP as inflation has been higher so far than the RBI forecast for Q3 and GDP growth has come much below expectations in Q2. It would hence be of interest to see what the projections this time are,” Sabnavis said.
India’s Economic Growth Slows Down
India’s economic growth slowed to a near two-year low of 5.4 per cent in the September quarter of this fiscal due to poor performance of manufacturing and mining sectors, but the country continued to remain the fastest-growing large economy, as per government data released on Friday.
ICRA’s Take on Inflation and Growth
Aditi Nayar, Chief Economist and Head – Research & Outreach, ICRA, said that with the CPI inflation having breached the 6 per cent upper limit of the medium-term range of 2-6 per cent in October 2024, ICRA anticipate a status quo from the MPC in its December 2024 meeting, in spite of the GDP growth print for Q2 FY2025 sharply undershooting the committee’s expectations.
“At the same time, we anticipate that the MPC will moderate its growth forecast for FY2025 next week. A February 2025 rate cut may be forthcoming if the next two inflation prints recede,” Nayar added.
RBI’s Inflation Target and Past Trends
The government has tasked the RBI to ensure that consumer price index (CPI) based retail inflation stays at 4 per cent with a margin of 2 per cent on either side.
The central bank last hiked the repo rate to 6.5 per cent in February 2023 and since then it has held the rate at the same level.