Home loan borrowers’ wait for a fall in their EMIs got longer with the RBI deciding to keep the repo rate unchanged for the sixth consecutive MPC meeting since February 2023. The borrowers have been eagerly waiting for the interest rate cycle to reverse so that they can get a respite from high interest.
While the central bank has held back a rate reduction this time, it may soon have to start reducing the rate. We tell you why home loan borrowers can expect a fall in rate later and how they can make the best of such rate cuts.
Benign inflation and robust economic growth may help RBI to reduce rates in coming days
Rising global inflation was the major reason why the Reserve Bank of India (RBI) raised the repo rate by 2.5% between May 2022 and February 2023. However, inflation has subsided since then and is now below 6%, the upper level of the tolerance zone of the RBI.“The government has pegged only a moderate growth in non-capex expenditure. This should keep inflation under check and provide enough headroom to the RBI to cut interest rates,” says Pankaj Pathak, Fund Manager-Fixed Income, Quantum AMC.
Consumer Price Index (CPI)-based inflation went up from 5.65% in November to 5.7% in December. However, core inflation has remained benign and slowed to a 2-year low of 3.9%. “We anticipate headline inflation to remain range-bound around 5-5.2%YoY in 1Q24, due to a faster deceleration in vegetable prices and favourable base effect, and average at 5.4%YoY in F24 and 4.5% in F25,” says a Morgan Stanley research report dated January 21.
“We continue to expect RBI to fine tune liquidity conditions to manage the overnight to inch towards the repo rate. The change in stance could follow towards end of 1QFY25 and subsequently shallow rate cuts starting in 2HFY25,” says Upasna Bhardwaj, Chief Economist, Kotak Mahindra Bank.
“With a similar stance as the last time, we feel the interest rates have peaked and there are higher chances that this accommodative stance would shift in the latter half of the year, by when the interest rate cuts would begin,” says Umeshkumar Mehta, CIO, SAMCO Mutual Fund.
Factors that are likely to hasten the interest rate fall
The budget has also given additional reasons for a quicker interest rate reduction. “The lower fiscal deficit figure of 5.1% versus market expectations of 5.3-5.4% has been a positive for the markets,” says a note from Axis Mutual Fund. “Furthermore, the lower gross market borrowings is another positive. These coupled with the expected inflows in JP Morgan Indices Index beginning June 2024 will help bring down yields further lower. We expect the Reserve Bank of India to complement the budget with changed stance on liquidity and lower interest rates in the second half of the year.”Bank of Baroda BNP Paribas Mutual Fund says: “The Advanced Economy central bankers came with much stronger rate hikes to curtail inflation as against, say, India where the rate hiking cycle halted at 6.50% (implicit cost of capital). Thus, we expect the rate cutting expectations from RBI to be much shallower into 2024.”
The report expects the RBI to ease the repo rate by 50-75 basis points, taking the rates to 5.75% levels within 18 months.
While many experts were estimating the rate cut to happen in the second half of the year, it is likely to start earlier following the recent development, though at a slower pace. “On monetary policy, we build in a shallow rate cut cycle of 50bps from Jun-24, in our base case, even as we continue to remain watchful of risks from stronger-than expected growth (strong credit growth), which may defer the rate easing cycle,” says the Morgan Stanley report.
“We continue to expect stance change in Q1FY25 and a 50 bps rate cut in the second half of FY25,” says Deepak Agrawal, CIO – Debt, Kotak Mahindra AMC.
“Headline inflation has moderated to 5.5%, which is positive news. If the current scenario persists, we may anticipate a rate cut in the next MPC meeting,” says Amit Goyal, MD, India Sotheby’s International Realty.
What should home loan borrowers do?
A 0.5% drop in your home loan interest rate can save you Rs 3.83 lakh if the interest rate on your Rs 50-lakh loan for 20 years comes down from 9% to 8.5%. This will give much needed relief to old home loan borrowers who have seen their interest rate rise sharply within the last 3 years.
If you wish to get the maximum benefit out of the falling interest rate cycle, then you need to make sure that your loan regime is the external benchmark-linked lending rate (EBLR). Check with your bank to know if your loan regime is under any other old regime like BPLR, Base Rate or MCLR. If yes, you need to apply for a change of the loan regime to EBLR.
If you have taken the home loan from an NBFC or a housing finance company, you would not get the option to switch to EBLR. You would be better off by sticking with a lender who has a reputation of giving the most competitive rates on home loans to its existing borrowers.
If your existing home loan lender is charging a higher rate than what other lenders are offering, you can ask your lender to reprice your home loan to a lower rate. You can also consider refinancing your home loan in case your lender is not offering a lower rate.
“Existing borrowers will continue to have it tough for a few more months—hopefully no more than a couple of quarters—after which one hopes that inflation would have cooled enough to warrant a repo rate cut. Existing borrowers may be paying a higher-than-market spread, well over 2.00 over the repo rate. Around 2021 and 2022, the lowest rates in the market were around the 6.50, when the repo rate was 4.00, implying a spread of 2.50 over the repo rate. Those borrowers have the option of refinancing their loans to a lower spread and lower rate to save interest costs. This is important for borrowers with government banks where a large percentage of loans continue to be on older benchmarks such as MCLR and base rate where interest rates may be marginally higher compared to the repo-benchmarked loans we have today. Refinancing with one’s own bank is simple and low-cost but can potentially save lakhs for borrowers,” says Adhil Shetty, CEO, Bankbazaar.com.
If you are a new home loan borrower, you will automatically get the benefit of the fall in rate very soon provided your loan is from a bank. If the loan is from an NBFC, make sure it offers a competitive rate. Even a minor reduction in interest rate may offer a big saving in the long run.
“Home loan rates are already lower compared to 2023 levels where they had started touching 9%. The lowest home loan rates today are in the 8.30 range, with several lenders grouping around 8.50 for eligible borrowers. This is a good market for new borrowers who can lock in a low spread of under 2.00 over the repo rate,” says Shetty.