The Reserve Bank of India (RBI) raised the benchmark lending rate by 40 basis points (bps) to 4.40% on May 4 in an attempt to keep inflation under control for the first time in two years.

The real estate analysts revealed that this is undesirable because the repo rate rise, including cost-push inflation in building, is expected to reduce the residential sector's development trajectory, which does not augur well for the Indian real estate industry. The decision came after an unplanned meeting of the Monetary Policy Committee (MPC), in which all six members voted unanimously for a rate rise while keeping the accommodating stance.

The unexpected action comes ahead of the US Federal Reserve's projected rate hike and amid consistently high retail inflation over the central bank's comfort zone.

According to experts, the goal of this dynamic reaction is to keep inflation under control while also ensuring that the Indian economy's recent broad-based growth is not harmed.

Furthermore, rising interest rates and inflationary trends in primary construction raw materials such as cement, steel, and labour costs would exacerbate the burden on the residential sector, which performed very well in the previous quarter - the first quarter of 2022 (Q1 2022).

Anuj Puri, ChairmanANAROCK Group, told the media that this increase in interest rates will have an influence on homebuyers' overall purchase costs and may depress residential sales to some extent. According to ANAROCK's recent consumer study, at least 56% of respondents believe that home prices will climb in 2022.

Puri said that a deep dive indicated that a price increase of less than 10% will have a strong impact on residential sales, while a price increase of 10% or more will have a moderate-to-low impact.

According to him, a 10% increase in overall acquisition expenses will harm existing sales velocity.

Niranjan Hiranandani, vice chairman of NAREDCO, informed that the decision is a short-term reaction to crude prices and the impact of inflation on commodities.

In terms of real estate, he hoped that the increase in repo rates will not have an influence on house loan interest rates; and that the regulator will guarantee that inflationary pressure on individuals is not worsened by increased home loan rates.

Hiranandani added that RBI's action comes as India's inflation rates have soared to new highs, with retail inflation hitting a 17-month high in March.

He said that India's inflation rates have been beyond the RBI's top range of tolerance, which is 6%, and the logic for the move makes sense — the aim being that house loans would not be harmed.

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