There is likely to be no change in the current repo rate in December, says Kanika Singh of IMGC.

Ahead of the upcoming RBI Monetary Policy Committee (MPC) meetings, which will consider the possibility of cutting repo rates, Kanika Singh, Chief Risk Officer, Indian Mortgage Guaranty Corporation (IMGC), discusses the key factors that could influence the governor’s decision.

In conversation with Business Today’s Navneet Dubey, Singh explores how the dynamics of inflation and economic growth could impact the RBI’s policy stance. It also highlights the potential impact of rate adjustments on mortgage demand, affordability and the broader property market, offering practical insights for borrowers considering potential changes to loan structuring against the backdrop of these potential rate changes.

BT: Given the current economic conditions and the stance of the RBI, how do you assess the likelihood of a repo rate cut at the upcoming MPC meetings? Which factors do you think will have the greatest impact on RBI’s interest rate decision-making process?

KS: In the latest MPC report, RBI maintained the repo rate at 6.5% but changed its stance to neutral. Markets expect a rate cut of at least 25 bps. in December MPC. However, given the sharp increase in headline inflation (reported at 5.5%) and the RBI governor’s latest statement on looming inflation risks, it is unlikely that there will be any change in the current repo rate in December. Additionally, India’s growth outlook remains robust and is expected to reach a record 7.2% in FY25. Factors that will influence the RBI’s decision in the near future include the inflation outlook, economic growth and overall macroeconomic stability. Additionally, with the addition of three new members to the MPC, there could be some possible changes in position given concerns about loss of growth momentum.

BT: How do you think the reduction in the repo rate will affect the demand and availability of mortgage loans? What are the current demand trends for mortgage loans, especially in the affordable housing segment? How has the holiday season typically impacted demand in the past? How might this impact homebuyers and developers in this area?

KS: There will certainly be a positive impact as affordability has become an issue as loans continue to be expensive and the average check size for real estate has been steadily increasing over the past few years.

The Indian housing market is showing signs of moderation with all segments such as high-end, mid-range and affordable largely remaining at the same level as compared to the previous quarter. The real estate sector does peak during the festive season, but factors such as high cost of capital, inflationary pressures and the uncertain timing of RBI’s repo rate cut may force some homebuyers to take a wait-and-see approach for now.

BT: How will the reduction in the repo rate affect existing mortgage borrowers? What specific benefits can new and existing mortgage borrowers expect from the repo rate reduction? Will there be opportunities for refinancing or early repayment of loans?

KS: When RBI lowers the repo rate, existing home loan borrowers can expect a reduction in the prevailing interest rate. Borrowers will see benefits either through lower EMIs or shorter loan tenures. Since the cost of funds is likely to come down whenever monetary easing begins, financial institutions (FIs) may offer new loans at attractive/lower interest rates. Existing borrowers can avail the opportunity to transfer their loans to financial institutions offering these rates and benefit from lower EMI outflows.

BT: In light of potential rate cuts, should borrowers choose fixed or variable rate loans? What factors should they consider when making this decision?

KS: Borrowers are encouraged to take out variable rate loans, especially if we get into a cycle of declining interest rates. Borrowers should assess their ability to service their obligations by emphasizing the return on investment, for example, if an FI is offering an 8% rate, then borrowers should run a simulation to see the outflow of funds if the interest rate fluctuates +/- 2%.

BT: What strategies would you recommend for borrowers to maximize the benefit of a potential repo rate cut?

KS: Borrowers can transfer the balance of their home loan to financial institutions that offer reduced interest rates. If affordability is not an issue for borrowers, then they can continue with the same EMI outflow but with a faster loan repayment period.