Rising interest rates won't impact housing demand: HDFC chairman Parekh

The demand for housing and home loans in India is unlikely to be impacted by macro-economic changes and a rise in interest rates, HDFC Chairman Deepak Parekh said.

The financial sector veteran said that despite rate hikes by the Reserve Bank of India (RBI), the current interest rates on home loans were below the pre-pandemic level. A home loan is for a long tenor and during this period there are bound to be both upward and downward interest rate cycles, he said at the annual general meeting of Housing Development Finance Corporation (HDFC) on Thursday.

During the peak of the pandemic, the RBI reduced the repo rate by 115 basis points (bps) in quick succession, besides other liquidity measures to support the economy. This position is now being unwound with the central bank having raised rates by 90 bps and more hikes likely to come.  It was unrealistic to believe that such low interest rates and high levels of surplus liquidity would sustain, he said.

The reality is that markets began to pencil in expectations of policy rate increases from October 2021 itself, when the variable reverse repo rate began aligning with the repo rate. 

In the quarter ended June 30, 2022, HDFC’s retail business continued to perform well, but the manner in which interest rates have moved has resulted in some transmission lag. This may have a short-term impact on margins, largely in comparison to the corresponding quarter of the previous year. The impact on the Net Interest Margin, which stood at 3.5 per cent for the March quarter and 3.7 per cent for June 2021 quarter, will be for a “quarter or so”. “We expect stable spreads and margins going forward,” Parekh said. 

Despite changes in the macro environment, the growth potential for housing in India remains immense. Property prices are seeing measured increases to the extent of the rise in input costs and developers are unlikely to opt for sharp increases. They recognise that outpricing home buyers and having large stocks of unsold inventory is counter-productive for them, he said.