RBI's pandemic rate cuts give the biggest stimulus to realty

Real estate turned out to be the biggest beneficiary of the Reserve Bank of India's (RBI) aggressive rate cuts and liquidity push through the pandemic, with commercial properties reporting a financing-cost shrinkage of 283 basis points - nearly three times the reduction in official policy rates.

One basis point is 0.01%.

In response to the unprecedented lockdowns, the RBI reduced policy rates by 115 basis points, causing the cost of financing to hit the lowest on record.


On average, the repo rate stayed at 4%, but loans for commercial real estate averaged around 7.14% at the end of February 2022. Likewise, housing loans also saw rates drop by 129 basis points.

Unsecured loans saw rates decline 218 basis points. Trade and agriculture got the least benefits at 5 and 64 basis points, respectively.

"Our conversations with lenders in recent months suggest extremely high levels of bullishness," said MB Mahesh, director, Kotak Securities. "This implies that they are likely to go down the risk curve or duration curve, and borrowers are still quite wary to take credit."

On outstanding rupee loans, the transmission was the highest in the unsecured category with rates falling by over 165 bps, with interest averaging at 10.39%. Housing loans, too, saw a big relief of 110 bps. Outstanding loans to the medium and small sector saw rates drop by 124 bps while those to large industries fell by 122 bps.

But with RBI signalling that its priority now is to restrain inflation, the low interest rate cycle is set to reverse. The country's largest lender, State Bank of India, has raised its marginal cost of lending rate (MCLR) for all categories of loans - homes, vehicles or corporates - by 10 basis points.

Bank of Baroda, too, had raised the marginal cost of funds based lending rates by 5 basis points across tenors. For the lender, its one-year MLCR is now 7.35%. Private lender Kotak Mahindra Bank, too, raised its MCLR by five basis points across all tenors. Its one-year MCLR is now 7.4%. More than 53% of all bank loans are linked to MCLR.

"We are decidedly in the last leg of the rate-cut cycle pricing," said Suyash Choudhary, head-fixed income, IDFC AMC.

Banks and non-bank lenders have bumped up lending rates by up to 15 basis points over the past month on tightening liquidity conditions and higher deposit costs.