RBI imposes Monetary Penalty on Sappers Finance and Consultancy Private Limited
The Reserve Bank of India (RBI) has imposed a monetary penalty of Rs. 1.50 lakh on Sappers Finance and Consultancy Pvt Ltd., Kolkata (the company) for non-compliance with the directions issued by RBI.
The Directions which were violated by the banks are (i) ‘Requirement for obtaining prior approval of RBI in cases of acquisition/transfer of control of Non-Banking Financial Companies (NBFCs)’; and (ii) ‘Non-Banking Financial Company Returns (Reserve Bank) Directions, 2016’ read with directions issued by RBI on ‘Format of Statutory Auditors’ Certificate (SAC) to be submitted by NBFCs’.
This penalty has been imposed in exercise of powers conferred on RBI under the provisions of Section 58G (1) (b) read with Section 58B (5)(aa) of the Reserve Bank of lndia Act, 1934.
This action is based on deficiencies in regulatory compliance and is not intended to pronounce upon the validity of any transaction or agreement entered into by the company with its customers.
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The yield on corporate bonds across maturities rose 8-18 basis points during the month.
Fundraising through corporate bonds and commercial papers in October fell to its lowest level in 2023, which experts attribute to the rise in yields on these instruments and tight liquidity conditions in the banking system.
“Tight liquidity kept short-term rates elevated throughout the month and a kneejerk reaction to the RBI Governor’s remark on OMO sales led to the selloff in long bonds,” said Mataprasad Pandey, Vice President, Arete Capital Service.
According to data compiled by Prime database, corporates and banks raised Rs 34,632 crore through corporate bonds in October, and commercial papers worth Rs 74,804 crore were issued in the same month.
Ajay Manglunia, managing director and head of investment group at JM Financial, said that during this period, there was a huge volatility in US Treasuries with an upward bias on yields.
“Resulting all (Because of) this uncertainty, volumes in both the primary and secondary market drifted lower, with issuer(s) also had (having) to stop in (due to) lack of demand,” Manglunia said.
Also read: Investors think equities riskless but money flow will change once they realise otherwise: S Naren
Why yields rose
The yield on the bonds was impacted after Reserve Bank of India (RBI) Governor Shaktikanta Das said during his October monetary comments that in order to manage liquidity, the central bank may consider OMO sales.
Das added that the timing and quantum of such operations would depend on evolving liquidity conditions.
Reacting to this announcement, the yield on government securities rose 10-15 basis points. This was followed by the yield on corporate bonds.
In October, the yield on corporate bonds across maturities rose 8-18 basis points.
The yield on three-year corporate bonds, which was at 7.79 percent at the end of September, rose to 7.87 percent in mid-October, before ending at 7.81 percent at the end of October, according to Bloomberg data.
Whereas the yield on corporate bonds maturing in five years was at 7.71 percent in September, and rose to 7.89 percent mid-October before declining to 7.76 percent at the end of October.
The yield on 10-year corporate bonds also moved up to 7.78 percent at the end of October, as compared to 7.70 percent at September-end. It rose to 7.84 percent mid-October.
What does the data say?
On a monthly basis, issuance of corporate bonds fell 51.75 percent, while commercial paper issuances fell 37.77 percent.
As per the data, Small Industries Development Bank of India, National Bank for Agriculture and Rural Development, Power Grid Corp of India, Bajaj Finance, and India Infrastructure Finance Co. Ltd were the top five issuers in October.
These companies together raised around 35 percent of the total issue.
Small Industries Development Bank of India raised Rs 3,022 crore, National Bank for Agriculture and Rural Development raised Rs 2,518 crore, Power Grid Corp of India raised Rs 2,250 crore, Bajaj Finance raised Rs 2,236 crore, and India Infrastructure Finance Co. Ltd raised Rs 2,000 crore.
Also read: Mutual funds load up on BSE, Dixon Tech in October, sell Suzlon Energy, Chola Finance
Outlook
Money market experts said that issuances are likely to improve in the coming days as the chances of OMO sales are waning due to tight liquidity conditions.
“With no announcement of an OMO sale so far, we expect that things may be normal by the end of November and supply may improve with demand becoming better,” said Manglunia.
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RBI Monetary Policy 2023: The unchanged repo rate is a festive bonanza for homebuyers and gives them yet another opportunity to make cost-optimised home purchases.
The Reserve Bank of India (RBI)’s Monetary Policy Committee (MPC) on October 6 announced that it has decided to leave the repo rate unchanged at 6.5 percent. This decision is expected to boost housing demand in the upcoming festive season when many homebuyers decide to book homes, said real estate experts reacting to the announcement.
Since May 2022, the regulator has hiked the repo rate by 250 basis points to counter inflationary pressures, and for the last four MPCs the repo rate has remained unchanged.
Festive bonanza
“The unchanged repo rate is a festive bonanza for homebuyers and gives them yet another opportunity to make cost-optimised home purchases. If we consider the present trends, the overall consumer market looks bullish across sectors, particularly the automobile and housing markets, which in many ways reflect the health of the economy. We are entering the festive quarter with a very strong momentum in housing sales, and unchanged interest rates will act as a major catalyst for growth in the residential market,” said Anuj Puri, Chairman – ANAROCK Group, a real estate consultancy firm.
“As per ANAROCK Research, housing sales across the top seven cities created a new peak in Q3 2023 (despite the usually slow monsoon quarter) and stood at 1,20,280 units as against over 88,230 units sold in Q3 2022, thus recording 36 percent yearly growth. (With) the stable repo rate and the resultantly stable home loan interest rates, we can expect the momentum to continue,” Puri added.
Earlier in August 2023, ANAROCK had released a report stating that homebuyers’ EMIs had jumped up by 20 percent in the last two years. Home loan borrowers who were paying an EMI of approximately Rs 22,700 in July 2021 are now paying approximately Rs 27,300 – an increase of approximately Rs 4,600 per month.
Also read: RBI policy meeting: Decision to hold rates again expected to boost real estate demand, say experts
Improve affordability of homes:
“The status quo on the policy rate was on expected lines as the focus of the MPC has been on prioritising growth and giving demand stimulus during the ongoing festive season. Though the inflation has been softening over the long term, it still remains above the upper tolerance limit of the Central Bank and the impact of monsoons is yet to be factored. Headline inflation fell to 6.8 per cent in August from 7.4 per cent in July with the cooling of vegetable prices,” said Dr. Samantak Das, Chief Economist and Head- Research & REIS, JLL India, a real estate consultancy firm.
“The fourth pause in policy rate augurs well for the real estate sector, especially residential as the sustained affordability is reflected in the growing sales momentum. Going forward, the steady employment growth and incomes will improve the affordability of home buyers and support growth of the residential sector. There is a possibility of a policy rate cut in 2024 provided the GDP growth and inflation support such a stance of the RBI. In that scenario, we would likely see a further growth trajectory in the real estate sector, particularly the residential segment,” he added.
“We welcome the decision by the Reserve Bank of India to maintain the benchmark interest rate at 6.50 percent in today’s monetary policy review. RBI’s commitment to aligning inflation with the four percent target on a durable basis is a positive signal for the real estate sector. This decision instills confidence in the market and encourages investment in real estate, both from domestic and foreign investors,” said Pradeep Aggarwal, Founder & Chairman, Signatureglobal (India) Ltd.
Also read: RBI monetary policy: Key takeaways from Das’s address
“He added, “Stable interest rates are a crucial factor for the real estate industry as they play a significant role in shaping the affordability of home loans and, consequently, the demand for housing. With the policy repo rate remaining unchanged, potential homebuyers can continue to benefit from competitive mortgage rates, making homeownership more accessible.”
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MUMBAI: Bank credit to housing as well as commercial real estate witnessed nearly 38 per cent annual growth in July, taking the loan outstanding to the realty sector to a record Rs 28 lakh crore, as per the latest RBI data.
It is evident from the Reserve Bank’s loan outstanding data as well as property consultants data on housing sales and new launches across major cities that activities in the real estate sector are moving at a fast pace.
The credit outstanding in housing (including priority sector housing) rose 37.4 per cent annually in July crossing Rs 24.28 lakh crore, showed the RBI’s data on ‘Sectoral Deployment of Bank Credit – July 2023’.
The credit outstanding to the commercial real estate increased by 38.1 per cent to Rs 4.07 lakh crore.
Commenting on the RBI data, Anarock Chairman Anuj Puri said the impressive loan growth in the real estate sector is a function of a large-scale demand revival across the board.
“The commercial office segment was reeling under the pandemic’s pressure last year as employers were contemplating strategies around complete work from the office, work from home, or a hybrid model. However, as the situation gained normalcy, employees returned to offices and the demand for good quality commercial offices is high this year,” he said.
Another set of RBI data showed that All India HPI growth (y-o-y) inched up to 5.1 per cent in the first quarter of 2023-24 from 4.6 per cent in the previous quarter and 3.4 per cent a year ago.
In 2022, Puri said housing sales across top 7 cities were 54 per cent higher than the previous year. In January-June 2023, sales have already reached 63 per cent of the previous year, indicating the sustained demand.
The demand remained undeterred despite a steady rise in home loan interest rates, he added.
Samantak Das, Executive Director and Head of Research, JLL India, said the RBI’s latest sectoral credit data showed a remarkably high growth in bank lending to the real estate sector in July 2023.
“This is the impact of the merger of a non-banking financial company with a bank. On excluding the impact of the merger, lending to commercial real estate in July 2023 increased by ~12 per cent y-o-y and housing loans increased by ~13 per cent y-o-y during the same time frame,” he added.
Das said this double digit growth is considered quite robust given the challenging economic scenario globally.
“The double-digit growth can be attributed to the rising demand for housing which is reflected in the robust sales volume recorded till June 2023,” he added.
Aman Sarin, Director & CEO, Anant Raj Ltd, said the growth in credit indicates that the real estate sector is growing and people are investing in the sector.
“This also indicates that the banking sector is positive about real estate and willing to provide capital for construction of commercial and housing projects,” Sarin said.
Real estate developers and consultants exuded confidence that the sales momentum in the real estate sector will continue. They are also bullish about bumper sales in the upcoming festive season.
Mohit Jain, Managing Director, Krisumi Corporation, said: “The festive season typically brings optimism and increased real estate transactions.”
The residential real estate sector is presently experiencing robust growth, and this trend is expected to persist, Jain said.
Puri of Anarock said the demand momentum is likely to continue, and the real estate sector is likely to scale newer heights.
As per the Anarock data, the total housing sales increased to 2,28,860 units during January-June this year across seven major cities from 1,84,000 units in the year-ago period.
These cities are — Delhi-NCR, Mumbai Metropolitan Region (MMR), Bengaluru, Hyderabad, Chennai, Pune and Kolkata.
This is despite the rise in interest rates on home loans by around 250 basis points in the last one and a half years and also increase in prices of residential properties after the COVID pandemic.
Property registrations in the Mumbai real estate market from January to July 2023 were the second highest on record with over 72,700 registrations, while registration revenue collection of close to Rs 6,500 crore was the highest, according to data from Maharashtra’s Inspector General of Registrations and Stamps (IGR).
In the first seven months of 2022, Mumbai reported 78,101 registrations and Rs 5,280 crore as revenue from registrations, according to Knight Frank India, a real estate consultancy that collated the data.
“The city in the first seven months of 2023 registered a total of 72,706 units, leading to a substantial revenue collection of over Rs 6,453 crore for the state exchequer. Highest compared to the same period since 2013,” Knight Frank India said in its report on July 31.
“This surge in property registrations has significantly benefited the Government of Maharashtra. The rise in revenue can be credited to several contributing factors, such as the higher value of properties being registered and the increased stamp duty rate,” the repor added.
The current stamp duty for purchasing a property in Maharashtra ranges between 5 percent and 7 percent. The registration fee is Rs 30,000 for properties worth more than Rs 30 lakh and 1 percent of the value of the property for homes below Rs 30 lakh.
What happened in the first quarter of 2023?
In January 2023, the city reported 9,001 property registrations and a revenue to the state exchequer of Rs 692 crore. In February, registrations stood at 9,684 and the revenue at Rs 1,112 crore, while in March, the city reported 13,151 registrations and over Rs 1,143 crore revenue.
The higher numbers for February and March owe to the large number of high-value transactions—above Rs 10 crore—transacted in the financial capital.
This was after Budget 2023-24 imposed a Rs 10-crore cap on the reinvestment of capital gains from the sale of long-term assets, including property, which became effective from April 1, 2023. No such cap was applicable earlier.
Moneycontrol had reported on March 30 that there were as many as 130 transactions involving properties valued above Rs 10 crore in Mumbai in February 2023, totalling Rs 5,595 crore, according to data from Zapkey.com.
This number is historically the highest compared to deals closed in February of previous years. Compared with 75 deals in February 2022, there were 130 transactions in February 2023, a 75 percent increase.
Top deals
The largest contributor to the registration department’s revenue in February and March 2023 came from the 28 housing units worth Rs 1,238 crore that were purchased by family members and associates of D’Mart founder Radhakrishna Damani in Mumbai.
Another much-talked-about deal was to do with Bajaj Auto chairman Niraj Bajaj, who bought a sea-facing triplex apartment in the posh Malabar Hill area of South Mumbai for Rs 252.5 crore, followed by the family members of industrialist JP Taparia, founder of contraceptive maker Famy Care, purchasing six sea-facing properties worth around Rs 369 crore in the same building from real estate developer Lodha.
What happened in the second quarter of 2023?
In April 2023, Mumbai reported 10,514 registrations and registration revenue went above Rs 900 crore, while in May 2023, the numbers went down to 9,823 registrations and Rs 833 crore in revenue, followed by June 2023 registering 10,319 registrations and revenue of Rs 859 crore.
In July 2023, the registration number stood at 10,214, fetching a revenue of Rs 832 crore from registrations.
According to real estate brokers, the number of registrations in May, June and July have risen owing to multiple factors.
Hiren Pandya, a real estate broker focused on the central suburbs of Mumbai, said, “The summer vacation months are preferred by homebuyers to book apartments and move in, and hence April, May and June witnessed a spike in registration numbers. Further, several homebuyers also booked units and utilised the 30 to 45 days’ window to complete the registration process and shift into the apartment.”
There are times when homebuyers book the apartment but execute the agreement along with other formalities of stamp duty and registration after a gap of 30 to 45 days in order to arrange for funds or if the homebuyer is awaiting clearances from the bank for a home loan.
“With the onset of the monsoon, site visits and closures slow down and the overall registrations also take a hit. In our opinion, the next few months are likely to witness a momentary slowdown, however, the long-term direction surely remains upward, and the Mumbai real estate sector seems to be on a strong footing,” ANAROCK, a real estate consultancy, said in its report released on July 31.
Another reason brokers ascribed to the steady momentum of registrations is the Reserve Bank of India’s (RBI) pause in hiking its policy rate that determines lending rates for home loans. According to brokers, this has instilled confidence in buyers of affordable housing.
Increase in transactions above Rs 1 crore
Further, over the past few years, there has been a consistent upward trend in the proportion of property registrations for properties valued at Rs 1 crore and above. The share of registrations for properties worth Rs 1 crore-plus has risen from 48 percent in 2020 to approximately 57 percent in 2023, Knight Frank India said in its report.
The report added, “The increase in property prices, combined with a notable rise of 250 basis points in interest rate during this period, has had an impact on property registrations below the Rs 1 crore mark. However, registrations for properties priced at Rs 1 crore and above have remained relatively unaffected by these changes.”
“As a result, there has been a noticeable positive impact on the share of property registrations for properties priced above Rs 1 crore, indicating a sustained demand in this higher price segment of the market,” the report further added.
“The demand in Mumbai’s residential market continues in the face of various challenges as consumers display enthusiasm for homeownership. Notably, there has been a considerable increase in the share of properties priced at Rs 1 crore and above. This can be attributed partly to the growing preference for larger homes and the rise in property prices. Additionally, the relatively better affordability of higher segment consumers has also contributed to this trend,” said Shishir Baijal, chairman and managing director, Knight Frank India.
New Delhi: Kerala’s commercial hub Kochi recorded the biggest leap in housing prices among the top 10 cities in the past one year, reveals Reserve Bank of India’s quarterly data. While the increase was 2.79% at the national level, the rise in house prices in Kochi was 7.15%.
The index is based on the housing sales in 10 important cities, including Ahmedabad, Bengaluru, Chennai, Delhi, Jaipur, Kanpur, Kochi, Kolkata, Lucknow, and Mumbai.
Kochi is the only city in Kerala included in the RBI data.
While there was an increase of 7.15% in Kochi this year, there was a drop of 8.9% in prices in Jaipur. At 5.2%, Ahmedabad recorded the second highest increase in prices after Kochi.
The RBI releases the housing price index every quarter based on transaction-level data received from the registration authorities in ten major cities. Time series data on all India and city-wise HPIs are available at the Bank’s database on Indian economy (DBIE) portal.
HOUSING PRICE INDEX: TOP-10 CITIES
· Kochi: 7.15%
· Ahmedabad: 5.2%
· Bengaluru: 4.81%
· Kanpur: 3.52%
· Chennai: 2.9%
· Kolkata: 2.73%
· Delhi: 2.7%
· Mumbai: 2.35%
· Lucknow: 0.93%
· Jaipur: -8.9%
National average: 2.73%
The figures are for the third quarter of the 2022-23 financial year.
The real estate sector stakeholders think the 25 basis points hike in the repo rate by the Reserve Bank of India (RBI) will have an adverse impact on the affordable housing segment. However, if the RBI measure results in more stability in the economy, that can in turn increase consumer confidence and demand for the sector in the medium term, sector experts say.
“The outrageous hike of 250 basis points since May 2021 needs to be warranted before it turns negative for the ascending Indian economic growth curve. The impact of the home loan interest rates hike will be highly deterrent in the affordable housing segment as it will impact the price-sensitive homebuyers and fatigue the supply of the developers. The luxury and mid-housing segment players will remain cautious with a bit longer sales cycle,” Niranjan Hiranandani, managing director of Hiranandani Group and National Vice-Chairman, NAREDCO said.
Anuj Puri, chairman of property consultancy ANAROCK Group says though the 25 bps rate hike is along the expected lines, the repo rate at 6.5% could have some repercussions on housing uptake as home loan interest rates will head further north.
“The rates had already crept up after five consecutive hikes over the past year. This will add to the financial burden on homebuyers as apart from home loan interest rates, property prices have also inched up in the past two to three quarters. Given that interest rates may breach the 9.5% mark with today’s hike, we may see some pressure on sales volumes in the affordable and lower mid-range housing segments, which are more cost-conscious. The affordable segment has already been in the doldrums, and adding further to the cost of acquisition obviously does not help,” he said.
Experts, however, felt that given the resilience of the Indian economy and the thrust given by the government for infrastructure development in the Union Budget 2023-24, the effect could be short-term.
“The Indian housing market continues to be largely end-user driven — and end-users, unlike investors, focus less on ROI and more on the perceived value of homeownership. Furthermore, commodity prices are now falling and inflation is moderating. As such, we are unlikely to see any hikes in the near future, which will be positive for the housing sector in times to come,” Puri says.
According to Hiranandani, the geo-political tumultuous, recession signals, and weakening of western economies will reorient the growth scale towards the booming economy of India. This phenomenon will continue to draw high global traction which will fuel the demand across the real estate asset classes.
Ramani Sastri, Chairman & MD of Sterling Developers saw the huge outlay on infrastructure and higher public expenditure outlined in Budget 2023-24 to be a silver lining. “Additionally, the buying power of consumers has gone up with greater income flow in recent times. We believe that the demand for the residential segment would remain robust in the near future, any hike in interest rates notwithstanding. Also, the strong fundamentals for housing demand will keep the momentum upwards for realty sales,” Sastri says.
Rising home prices and rentals in large Indian cities could pose a new challenge to the country’s central bank in its fight against inflation, even though headline consumer price rises have likely peaked, analysts warn.
Housing rentals and ancillary costs have a 10.07% weightage in India’s consumer price inflation basket and are near three-year highs, posing a fresh worry for the central bank that had to contend with rising food prices for most of last year.
Housing has turned sticky and is being watched closely for indications of second-order effects, a senior official aware of the Reserve Bank of India‘s (RBI) thinking said.
Urban housing inflation rose to 4.47% year-on-year in December 2022, versus 3.61% in the same period a year ago and 3.21% in December 2020, data from the Ministry of Statistics and Programme Implementation showed.
Though the index eased slightly in November and December from 4.58% in October, it remains close to its highest levels since 2019.
India’s retail inflation fell to 5.72% in December, within the RBI’s comfort zone of 2%-6% for a second straight month after staying above the upper end for the first 10 months of last year.
However, core inflation, which typically excludes volatile food and fuel prices, remained close to 6%.
“Core inflation has continued to remain sticky and hence an increase in housing inflation poses a significant risk to the overall inflation outlook,” said Aditi Gupta, an economist at Bank of Baroda.
She noted that the non-food basket has shouldered much of the recent inflationary pressure.
In the top seven cities, rentals rose 20%-25% on average in 2022 from pre-pandemic levels, with some of the more popular housing societies recording a jump of more than 30%, real estate consultancy firm Anarock said.
Some trends – like hybrid work culture and the need for bigger homes – are likely to stay despite the pandemic impact waning and could spill over into core inflation amid “sticky” rental prices, said Ranjani Sinha, chief economist at credit rating agency CareEdge Group.
HOUSE PRICES TOO SOARA housing price index, compiled by the RBI to capture home sales, also shows a steady rise to its highest in over a decade as of the quarter ended September last year.
Average house prices in the top seven cities – National Capital Region, Kolkata, Mumbai Metropolitan Region, Pune, Hyderabad, Chennai and Bengaluru – increased 4%-7% between October and December, according to Anarock.
That was mainly due to a rise in both input costs and post-COVID demand.
While housing prices are not part of the consumer price inflation basket, their effect is captured through construction and raw material prices, and analysts do not expect a slowdown any time soon.
In fact, housing prices will rise steadily in the next few years, roughly in line with overall economic growth, a Reuters poll of property experts last month showed.
Bank of Baroda’s Gupta echoed that prediction.
“While global commodity prices have eased, they still remain elevated. Realtors will continue to push the rise in input prices to consumers. Even on the demand side, it continues to remain strong, which will push prices higher,” she added.
Higher interest rates have not been much of a deterrent so far and are unlikely to affect demand going forward. At least not until rates cross 9%, estimates Dhaval Ajmera, director at realty developer Ajmera Realty and Infra India.
Analysts said rising house prices would also feed into higher demand for services like electricity and repairs, ultimately working their way into the overall inflation basket.
To use artificial intelligence and machine learning for supervisory functions, the Reserve Bank of India shortlisted seven global consultancy firms, including Pricewaterhouse Coopers, McKinsey and Boston Consulting Group (India).
The central bank is looking to extensively use advanced analytics, artificial intelligence and machine learning to analyse its huge database and improve regulatory supervision over banks and NBFCs. RBI is mulling to hire external experts for this purpose.
The RBI invited expressions of interest (EoI) for engaging consultants for use of advanced analytics, artificial intelligence and machine learning for generating supervisory inputs in September.
According to an RBI document, the central bank has shortlisted seven applicants for participating in the request for proposal process (RFP) for the selection of consultant(s).
The seven firms are Accenture Solutions Private Limited; Boston Consulting Group (India) Pvt Ltd; Deloitte Touche Tohmatsu India LLP; Ernst and Young LLP; KPMG Assurance and Consulting Services LLP; McKinsey and Company; and Pricewaterhouse Coopers Pvt Ltd.
Though the RBI is already using AI and ML in supervisory processes, it now intends to upscale it to ensure that the benefits of advanced analytics can accrue to the Department of Supervision in the central bank.
The Department of Supervision has been developing and using linear and a few machine-learnt models for supervisory examinations.
The interest now is to explore the data to identify its attributes that can be leveraged to generate new and improved supervisory inputs, said the EoI issued in September.
With PTI inputs.
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Retail home loan interest rates have breached the nine per cent mark after the Reserve Bank of India raised the repo rate again by 35 basis points (bps).
With the latest hike, the central bank’s repo rate has increased by 225 bps since April 2022. It means the equated monthly instalments (EMIs) would increase by 20 per cent or the loan tenure by 13 years.
Should You Buy A Home Now Or Later?
You can do so if you can afford it. Says Vishal Raheja, the managing director of InvestoXpert.com, a real estate consultancy firm, it won’t be a wise decision just because home loan rates have spiked. Home loan rates may increase or decrease, but property prices increase every year. “You should not miss the appreciation due to a spike in the repo rate,” Raheja adds.
Usually, the housing demand falls when interest rates rise sharply. It gives buyers an opportunity to negotiate with the seller for a lesser price. “It becomes a buyer’s market then and can result in a good deal,” says Chenthil Iyer, founder and chief strategist of Horus Financial Consultants.
Should You Go For Fixed Or Floating Rates?
As the rates are expected to go up, many believe a fixed interest rate loan could shield them from future rate hikes. However, Iyer says one should always opt for floating rates because interest rates generally fall in the long term.
“Consider what happened in the last 20-25 years. Interest rates at the time were around 11-12 per cent, but the current rates are in the range of eight to nine per cent even after the recent hike. So, a floating rate is a better option.”
Besides, floating rates offer repayment flexibility. For example, you can increase the EMI after a salary hike or prepay a reasonable amount when the rate increases without attracting a penalty. On the other hand, most fixed-rate loans have limitations that may not allow you to prepay a loan.
Agrees Raheja, “Floating is always good because fixed is always higher than floating. Raheja says the interest rate would come down to around 7.5 eight per cent in the long run. So it is a temporary spike.
Should You Increase The Tenure Or EMI?
He adds that a higher EMI is better than a long tenure. You can have freedom in old age if you close the liability at a young age. But if you can’t afford it, you will have no choice but to increase the loan tenure.
Iyer says one should raise the EMI when the interest rates go up to avoid a long tenure. If an increase in the EMI is not possible, “prepay some amount from your savings so that the EMI and tenure are not affected”. Increasing the tenure should be the last resort and must be used only if the above two possibilities don’t exist.
Furthermore, you should decide as per your age group. “If you are in the 30-40 age group, you can go for a long tenure to reduce the EMI burden. But if you are older, you shouldn’t increase your tenure because you may not be able to pay your EMIs by the retirement age,” says Raheja.