The Reserve Bank of India (RBI) is expected to increase interest rates once more. In an effort to combat inflation, the RBI increased the interest rate by another 50 basis points in August, following an increase of 40 basis points in May. According to a survey, there is widespread agreement that the RBI will raise interest rates at its meeting outcome on September 30th. The repo rate is the rate at which the Reserve Bank of India lends banks short-term money.

In the last three monetary policies, the RBI has increased the policy repo rate by 1.4%, bringing the rate to 5.4%. In the event of a rate hike, banks' cost of funding also rises, therefore they pass on the burden to borrowers by increasing lending rates.

Despite the RBI's repo rate hike for three consecutive sessions, which resulted in banks and NBFCs increasing benchmark lending rates and making EMIs more expensive, home purchase demand has remained consistent due to the monsoon. The interest rate has increased for both existing and new borrowers.

Notably, both of India's major monsoon months, July and August, have experienced enough rainfall. The country's overall season (June to September) was said to be typical. On the heels of a robust monsoon, demand for house loans has also increased significantly.

In the past three months, numerous large banks and NBFCs have increased their benchmark lending rates, which are linked to the repo rate, causing house loan rates to climb. Equated monthly installments (EMIs) have also become more expensive. Nevertheless, bank lending growth continues to increase despite the pattern of rate hikes.

How does the monsoon boost home loan demand?

A healthy monsoon increases the per capita income of states with a large agricultural sector, such as West Bengal, UP, Punjab, Gujarat, Haryana, and MP, which in turn increases demand for housing in these smaller towns. Around 58% of India's population depends on agriculture for their living, therefore the last 4 years of regular monsoons have had a favorable effect on demand in the rural sector.

The government of India's initiatives to advance Homes for All have raised demand and supply for affordable housing, which has had a beneficial knock-on effect on the demand for affordable house loans. The government's aim for inexpensive housing has resulted in various semi-urban and rural affordable housing projects. Over the past four years, housing has experienced a significant surge in Tier 2 and Tier 3 areas.

To conclude, an increase in rates by the RBI will also affect the growth of home sales. As raw material costs continued to rise, builders all over the country also raised the prices of homes. Consumer demand and their ability to pay will continue to go up, which is good news. However, tight interest rates may slow sales, and the real estate market will continue to recover slowly.