Floating Rate vs Fixed Rate: Which Home Loan To Prefer After Repo Rate Pause?

Both housing supply and demand are anticipated to retain their current pace as a result of the RBI's decision to keep the repo rate at 6.5 percent. Since inflation is at an 18-month low, there is the possibility of the RBI to lower repo rates in the future MPC sessions, which would drive down loan rates even further. Recent GDP data showed that Q4 GDP growth of 6.1% exceeded expectations and that total FY23 growth was 7.2%; these figures show that the Indian economy is healthy after the inflation rate has gone down. Which home loan, floating rate vs. fixed rate, should you select as a homebuyer given that loan rates will continue to decline? Let's find out from our advisors.

Aashika Jain, Financial Expert and Editor, Forbes Advisor India said "The RBI continuing to pause any further rate hike continues to reinstate India being in a sweet spot both on the external growth and domestic front. At 6.50%, the repo rate is still high and will continue working towards RBI's goal of achieving 4% headline inflation. The ramifications of RBI maintaining its stance as withdrawal of accommodation will continue to be felt across sectors including fixed investment instruments, home loans and realty. RBI's interventions coupled with the surplus liquidity from deposits of INR 2,000 notes will continue to support the fixed income markets. Bond yields are expected to rise from current levels amid uncertainty surrounding the impact of El Nino and rise in MSP of kharif crops that may fuel overall inflation."

"On the whole, with home loan rates already beyond 9%, some stability in rates is a wisp of breath for both lenders and borrowers. For borrowers specifically, the policy rate pause at 6.50% has left borrowers in a chicken-and-egg situation. If they opt for a fixed rate home loan, they'll end up paying a high interest rate for a long tenure as RBI's efforts fructify in the coming months and inflation is significantly brought down. With further policy revisions, such borrowers may end up with a high-EMI home loan. For those opting for a floating rate home loan, the added risk of any further hikes looms and if the impact of monsoon and global challenges rise, their choice may prove to be costlier than that of fixed-rate borrowers. For developers, a consecutive rate pause will establish a degree of stability and reinstate no significant impact on housing demand providing them a sense of relief," Aashika Jain said.

Gaurav Dua, Head Capital Market Strategy, Sharekhan by BNP Paribas said "The MPC has retained the status quo on policy rates and the monetary stance of "Withdrawal of accommodation" also remains unchanged which is in line with expectations. Certain sections of the market participants looking for dovish comments were disappointed with RBI maintaining a hawkish undertone. And rightly so, the Q4 GDP growth surprised on the upside, the inflation remains over 4% level and the possibility of weak monsoons could provide upward pressure on inflation. Additionally, the global scenario also remains challenging and uncertain. So essentially the policy meet has turned out to be a non-event though the consensus expectations of rate cut timelines seem to have extended now. We retain our positive bias on the equity markets in the medium term.In terms of sectors, we continue to focus on banks & financials, engineering, infra, building material and select consumer companies to play the multi-year economic upcycle in India. In the near term, we believe that the liquidity conditions could remain comfortable with flow of money into banks due to phasing out of Rs2000 notes. Also, this could boost consumption in the short term in the run up to the festive season in August and September."

Parry Singh, Founder & CEO, Red Fort Capital said "The Reserve Bank of India (RBI) has decided to keep the repo rate unchanged at 6.5 percent for the second consecutive time. This decision reaffirms the RBI's stance of withdrawing accommodation and aims to stabilize the borrowing environment for businesses, retail customers, and financial institutions. With the base effect stabilizing, non-banking financial companies (NBFCs) are expected to see growth in corporate loan segments. The next two quarters may see a rebound in demand for credit from NBFCs, and the benefits of this can be passed on to borrowers. This is a positive step with a long-term view of promoting the growth of the micro, small, and medium enterprise (MSME) segment and ensuring easier access to formal credit at favourable rates. With inflation stabilizing and declining, credit demand is expected to pick up, especially in the real estate sector from both retail and businesses. Stabilization of interest rates will be critical and highlights the government's long-term vision of a stable business environment with opportunities for value creation through formal credit."

Subhash Goel, MD, Goel Ganga Developments said "As expected, RBI has decided to keep the repo rates unchanged for the second time in a row. This is good news for the real estate sector and the outlook for homebuyers who are looking to buy a property via a home loan in the near future remains favourable. This announcement can provide a booster in maintaining the momentum in the housing sector which has so far been firing on all cylinders."

Sooraj Singh Gurjar Founder and MD, Get Together Finance (GTF) said "RBI maintains its realistic approach of balancing growth and inflation dynamics and decoupling from the global economy. Moreover, inflation over the past two months CPI is below the RBI's tolerance level, which encourages the RBI to keep the repo rate and the exchange rate unchanged. The sharp change in the spread between WPI and CPI from positive 880 basis points in May 22 to negative 560 basis points in April 23 will benefit the gross margins of the consumer-related sectors.Although, as expected, the interest rate decision and the MPC rate represent a pause and a withdrawal of accommodation, respectively, the Governor's comment can be interpreted as positive. 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. 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. From an equity market perspective, this is positive. The Governor's comment that "India's economic and financial sectors remain resilient amid global turmoil" reflects India's strong and improving fundamentals."

Gurmit Singh Arora, National President, Indian Plumbing Association said "The recent move to keep the REPO rate unchanged is on the expected lines. The Indian economic outlook looks promising with most leading agencies predicting a GDP growth rate in the range of 6-7%. The inflation pressure is within control. In April Indian inflation dipped to 4.7%, one of the lowest in the past 18 months. This is a positive sign not just for the economy but also for the real estate and allied industries. A strong economic outlook coupled with lowered inflation will drive growth in consumer spending. Meanwhile, there are threats from international geopolitical tensions and fragile global financial markets. This has led the government to keep the rate unchanged like previous times and further evaluate the situation."

Kaling Porwal, Managing Director, Downtown Lifespaces said "The Reserve Bank of India (RBI) has announced its decision to keep repo rates unchanged at 6.50%, aligning with market expectations. This move is likely to have implications for various sectors, including the home loan sector, debt instruments, and the real estate sector in India. For the home loan sector, the unchanged repo rates signify stability in borrowing costs. This can create a favorable environment for prospective homebuyers, as they can avail loans at relatively lower interest rates. The stable rates might incentivize more individuals to enter the market, potentially boosting demand for residential properties. In terms of debt instruments, the steady interest rates provide certainty to investors regarding expected returns. This can enhance the appeal of bonds and fixed-income securities, particularly for risk-averse investors seeking stable income streams. The real estate sector may benefit from the stable interest rates as well.

Lower borrowing costs can make it more feasible for developers to undertake new projects or expand existing ones. Additionally, homebuyers may be encouraged to make purchases, potentially increasing demand and sales in the real estate market. However, it is important to consider other factors such as supply-demand dynamics and regulatory policies, which also influence the sector's performance. India's status as the fastest-growing economy and its control over inflation compared to other nations contribute to a positive economic outlook. The stability in interest rates is expected to support economic growth, foster investments, and provide stability to the financial markets. While the unchanged rates suggest a promising future and a potential end to the RBI's interest rate hiking cycle, it is crucial to remain attentive to economic indicators and policy decisions that could affect the home loan sector, debt instruments, and the real estate sector in India."

Kaushik Mehta, Founder & CEO of RUloans Distribution Pvt. Ltd said "In the latest RBI Monetary Policy Committee (MPC) meeting, the RBI has decided to keep the policy rate unchanged. Additionally, the external benchmark lending rates (EBLR) linked to the repo rate will also not increase. With the repo rate remaining at 6.5%, there are potential implications for home loans. For borrowers with existing home loans, this pause in rate hikes means that their Equated Monthly Installments (EMIs) are likely to remain stable in the short term. If the repo rate remains unchanged, banks may not immediately raise the lending rates for their existing home loan customers. This can provide relief to borrowers with home loans. However, it is important to note that the specific terms and conditions of home loans, including interest rates, can vary among lenders. Therefore, it is advisable to consult with loan experts or advisors to understand how the RBI's decisions may impact your home loan EMIs."

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