The Reserve Bank of India (RBI) announces its monetary policy a minimum of four times a year, ideally every quarter. However, currently, it announces its policy every two months. With its monetary policy, the central bank manages & controls the ‘demand’ side of the economy to ultimately control inflation. The Reserve Bank of India hiked its key lending rate by a more modest 35 basis points to 6.25 per cent, citing inflation slowing after three consecutive 50-bps (basis points) hikes to manage price pressures which have been persistent above the upper end of its target band. From this article, one can understand terms like inflation, repo rate and the reason for a rate hike and its effects on real estate.?

1. All about Inflation?

Inflation is the rise of prices in each span of time. It is basically a calculated measure, such as the total hike in prices or the increase in the cost of living in a country. Whatever the context, inflation always represents how much more expensive the relevant set of goods and/or services have become over a certain period, most commonly a year.?

How is inflation Calculated??

Inflation is calculated by the agencies using the Consumer Food Price Index (CPI), which specifies the difference in the price of foods consumed by a typical family in India. It gives an idea of the increase in the cost of living.?

Reason to control Inflation??

?‘Anything in more is not healthy’ this phrase rightly shows the importance and need to control inflation. Rising inflation means one has to pay more for the same goods and services.?

2. An insight into Repo Rate??

The rate at which the central bank of a country (Reserve Bank of India in the case of India) lends money to commercial banks whenever they need money to manage their shortfall of funds is called Repo Rate. Thus, the Repo rate is a tool utilized by the Central Bank to control inflation.??

Central Bank’s reason to hike Repo Rate??

In the event of inflation, central banks increase the repo rate as this acts as a disincentive for banks to borrow from them. When the repo rate is increased it makes commercial banks pay more interest for the money borrowed by them and hence, a repo rate change eventually affects public borrowings such as home loans, EMIs, etcetera. Due to this the money supply in the economy is reduced and this helps to control inflation. There is a contrary position taken by the central bank in the event of a fall in inflationary pressures.??

Repo Rate hike effects on the end consumer??

?A repo rate increase makes public borrowings such as home and car loan Equated Monthly Instalments (EMIs) costlier because banks pass on the RBI’s repo rate hike when they lend money to one for buying a four-wheeler or a house property. So, while one may spend less on say their grocery and daily needs, still they have more money deducted from their account by way of EMIs to the bank.?

Reverse Repo Rate??

The reverse Repo Rate is the rate at which the central bank of a country pays its commercial banks to park their excess funds. The central bank of a country borrows money from commercial banks whenever they need funds and repays them interest applicable as per the reverse repo rate. The reverse repo rate provided by RBI is generally lesser than the repo rate at any given point in time. RBI increases the reverse repo rate when there is rising inflation, this encourages commercial banks to increase deposits with the central bank and make returns. This helps in the absorption of excess funds from the market and decreases the money available for the public to borrow.?

3. What are the effects of the Repo rate hike on Real Estate??

?RBI rate hike was very much expected. The rate hike will make the home loan EMI expensive. It might lead to short-term turbulence for real estate, but the buyers are very optimistic and there is demand. For an actual home buyer, the rate hike will not postpone or delay the decision. With the last quarter of the financial year approaching soon, real estate developers might take rate hikes as an opportunity and come up with schemes like interest absorption, discounts & offers to get the fence sitters to come forward and finalize the home. With January 2023 being the crucial month of the last quarter, Makar Sankranti & Republic Day will be linked to the offers rolled out by developers & will keep the momentum in pace for Real Estate.?

You can contact him through his Linkedin Page: Dr. Mohit Ramsinghani.???