For borrowers the new financial year FY 23-24 has brought with it big relief from rising interest rate. The Reserve Bank of India (RBI) in its second monetary policy meeting of the current fiscal, held on June 8, has decided to keep the repo rate unchanged at 6.5% yet again. This is welcome relief for home loan borrowers who saw a steep and big rise in their home loan interest rates within a span of just 10 months starting from May 2022 to February 2023, when RBI raised the repo rate by a total of 2.5%.
Are the two consecutive pauses in repo rate hikes a signal for the end of the current rising interest rate cycle? Is there a chance of interest rates falling soon?
The big impact of the rising interest rate cycle
Home loan borrowers, who had taken external benchmarked-linked loans recently and whose loan is linked to the repo rate, had to bear the full brunt of these repo rate hikes. Their home loan interest rates would have gone up in tandem with the repo rate hikes. As a result, for most of the borrowers, as a first recourse lenders typically increase the tenure of the loan. However, such an interest rate hike leads to situation where tenure rise option does not work anymore after a particular point. In such a situation, lenders are compelled to raise the EMIs.
For a home loan borrower who has taken a loan or Rs 40 lakh for 20 years at 7%, a rise of 2.5% means that his/her total interest payment has risen from Rs 34.43 lakh to 49.48 lakh. This is a whopping rise of 44% within such a short span. A tenure increase, which works to a limited extent, is not a less painful exercise. Despite an increase of 10 years in your tenure from 20 years to 30 years, the EMI would also go up by Rs 2,622 from Rs 31012 to Rs 33,634. In this case, the total interest outgo will rise from Rs 34.42 to Rs 81.08 lakh. This is a massive rise of 136% if you go for a combination of tenure increase and EMI rise.
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This is the reason why borrowers are advised to go for an EMI increase rather than tenure increase as the adverse impact of interest rate rise is reduced to a great extent.
Is this the end of rising interest rates?
The primary responsibility of the RBI has been to keep retail inflation at low levels in the range of 2-6%. The most critical factor that led to the interest rate hike cycle was rising retail inflation due to supply chain disruption caused by the Russia-Ukraine war. The very month of May 2022 in which RBI went for the first repo rate hike of this current cycle, witnessed the peak of retail inflation number of 7.79% for April 2022. Aggressive repo rate hikes helped RBI to bring inflation below 5% for the first time in April 2023 and as a result it was comfortable in pausing the interest rate hikes.
Withdrawal of accommodation stance of the RBI further strengthens the case that the possibility of any rate hike in near future is highly unlikely. Future direction of inflation will be the biggest factor that will determine the direction of interest rates. WTI crude oil prices which had gone up to a peak of $123 per barrel in June 2022 have now come down to below $75 per barrel now. The wholesale price index has fallen to negative territory almost after 3 years when it registered an inflation of -0.92% in April 2023. The 10-year G-sec yield, which is a good indicator of future expectation of interest rate movement, has already fallen from the peak of 7.459% on March 8, 2023 to 6.983% on June 7, 2023.
"The central bank's projection for inflation in FY24 CPI is 5.1%, lower than the 5.2% forecast at the last meeting. This suggests that the MPC has reached the end of the rate hike cycle, says Sooraj Singh Gurjar Founder and MD, Get Together Finance (GTF). All these factors indicate that while the fall of interest rates may take some time, however, the chances of any interest rate hike in near future is highly unlikely.
When will we see a fall in interest rates?
The US central bank increased the interest rates by 0.25% to a level between 5.0% and 5.25%. But according to a monthly report by ICICI Direct, the central bank has indicated that it may not raise the interest rates further for now and focus more on credit and other economic challenges. The market reacted to the rate hike by lowering the yields, as it anticipates a possible rate reduction by the year-end, instead of just a halt in rate hikes.
Many advanced economies are struggling to grow, while some have faced recession, many others are confronted with very low economic growth. Unless there is a significant pickup in the overall demand in these economies, global growth may remain subdued. The reduction of interest rates to revive growth is a step which many central banks may resort to sooner or later.
"This affirms the view that interest rates will only have one direction which is downwards. This is a big positive for the home buyer as they know that their EMIs down the line will only decrease further," says Piyush Bothra, Co-founder and CFO, Square Yards. Many experts see year-end 2023 or year beginning 2024 as a period when interest rate reductions may start globally. So, if there is durable sign of inflation subsiding, the RBI may follow also follow suit. Favourable monsoon may add the comfort. "If the monsoon turns out to be normal and the global scenario is favourable, the MPC could consider a rate cut in late CY2023 or early 2024," says Gurjar.
"The worst seems to be over. Interest rates are stabilising. Inflation permitting, we may see rates drop before the end of 2023," says Adhil Shetty, CEO, Bankbazaar.com. Some feel that the interest rate reduction may happen much earlier. "It is encouraging to note that domestic macroeconomic fundamentals are strengthening, with resilient economic activities, moderated inflation, comfortable current account deficit, and robust credit growth. If the situation persists or improves further, we can anticipate a potential rate cut in the next monetary policy review," says V Swaminathan, executive chairman, Andromeda sales and Apnapaisa.com.
What should borrowers do?
If you are a home loan borrower, there is hardly anything you can do about the interest rate movement but at least you can ensure that you are getting the best possible deal on your home loan. As interest rates have peaked, most borrowers will be paying the highest interest rates seen in the last three years on their EMIs. If you are an old borrower, servicing a loan under previous regimes like the MCLR or base rate, then it may be a good time for you to shift to the new EBLR regime. This is because when there is a fall in interest rates, you will quickly benefit from it.
"For home loan borrowers, it is better to stick to their floating interest rate loans for now. Fixed-rate loans may be available in the market at some discount compared to floating-rate loans. However, considering that rate cuts are expected a few quarters down the line, it makes sense to stick to floating rate loans," says Anshul Gupta, Co-founder and Chief Investment Officer, Wint Wealth.
You must compare your interest rate with other lenders and if you find that they are offering a much lower interest rate to a new borrower, then you may transfer your loan after calculating the net benefit. "If you’re on a repo-linked loan, your rate should automatically reset after any repo rate change within a quarter. The lowest rates being offered in the home loan market today are in the 8.40 to 8.50 for eligible borrowers. If you’re paying a significantly higher rate, consider a refinance. If you’re able to shave off 50 basis points or more off your rate, it could lead to significant savings over the long term," says Shetty.
While picking the next lender your research and good credit score may help in getting the best deal. "When you think about your home loan rate, also think of it in terms of the premium you pay over the repo. For example, at 8.50%, the premium over the repo is 2%. Prime borrowers with good credit histories and strong income credentials can borrow at the lowest premium while others will have to pay higher," suggests Shetty.
However, if your lender is giving a much lower rate to new borrowers, then you may request your lender to reprice your loan at a lower rate. They usually charge a repricing fee and restructure your loan at the new rate.
If your affordability has gone up after getting a salary rise, then you may consider increasing your EMI so that your total interest outgo could be brought down. "Borrowers who loan tenures increased due to back-to-back hikes may now consider making partially or fully repayment of their loans as the repo rate remains unchanged," advises Shetty.
If you are getting a bonus or incentive, then you may consider going for partial prepayment so that your home loan outstanding comes down which will help you reduce the tenure and total interest outgo of the loan.
If you are planning to buy a house with the help of home loan you will have a more positive view about future rates which may fall from current levels. "As home loan rates are already at elevated levels of 9% and above, this is a significant breather for lenders, developers & homebuyers. First time homebuyers will be better placed to make their home buying decision in a stable lending rate regime. Fence sitters in the affordable & mid segment will have greater visibility of their EMIs & thus effect buying," says Vimal Nadar, Head of Research at Colliers India
