The Reserve Bank of India's recent monetary policy move has sparked a crucial question for the real estate sector: can cheaper loans finally bring developers back to the neglected affordable housing segment? On Friday, December 8, 2025, the RBI trimmed the repo rate by 25 basis points, bringing it down to 5.25%. This marks a total reduction of 125 basis points for the year 2025.
The Demand Conundrum: Cheaper Loans Aren't Enough
As banks adjust their lending rates, equated monthly instalments (EMIs) are set to become lighter, making home loans more affordable. This should theoretically provide a significant boost to the affordable housing market, which is highly sensitive to interest rate fluctuations. Vivek Rathi, National Director of Research at Knight Frank India, highlighted that analysis indicates every 1% cut in the base lending rate results in a 0.24% increase in priority-sector home loans.
These borrowers, typically from economically weaker sections and lower-income groups, are also eligible for subsidies under schemes like the Pradhan Mantri Awas Yojana (PMAY). However, the ground reality is more complex. While financing becomes cheaper, the fundamental affordability of potential customers in this segment remains weak, exposing them to various financial hurdles.
This has directly impacted housing finance companies (HFCs) specializing in affordable loans. The September quarter (Q2FY26) saw these firms grappling with slower disbursements, elevated early delinquencies, and increased credit costs. An analysis by Kotak Institutional Equities revealed that disbursement growth for select affordable HFCs moderated sharply to 10% in FY25 from 19-34% in the preceding two years.
Key players like Aadhar Housing Finance Ltd, Aptus Value Housing Finance Ltd, Home First Finance Co., and India Shelter Finance Corp. are feeling the pinch. The management of Can Fin Homes Ltd pointed out that since the credit-linked subsidy scheme has stopped, disbursements have been weak across the industry. They added that since PMAY 2.0 launched in September 2024, the offtake has been muted, payouts are deferred, and new launches have not picked up.
The Supply-Side Struggle: Where Are the Developers?
On the supply side, the rate cut lowers the cost of capital for developers, which should help in accelerating project execution. Yet, this financial easing is unlikely to shift their current strategic focus. Developers continue to prioritize the premium and luxury residential segments, which offer better margins and greater scope for price appreciation.
Data from Anarock Property Consultants underscores this trend starkly. Between 2022 and 2025 (year-to-date), affordable homes priced under ₹40 lakh saw an average price appreciation of just 26%. In contrast, mid-premium homes (₹40 lakh - ₹1.5 crore) appreciated by 39%, and luxury homes (above ₹1.5 crore) by 40%.
In this backdrop, elevated land acquisition and construction costs have made the affordable housing segment financially less enticing for many developers. Profitability is challenging, and any project delays can quickly escalate costs, eroding thin margins. Listed developers are now betting on new projects in faster-moving, premium segments to achieve their target of 18-20% year-on-year pre-sales growth in FY26.
A Glimmer of Hope and a Persistent Challenge
There is a glimmer of structural hope. The Ministry of Housing and Urban Affairs recently sanctioned 141,000 additional houses under the PMAY-Urban 2.0 scheme. With increasing urbanization, the fundamental need for affordable housing is expected to rise.
However, the consensus among analysts is clear: the tide is unlikely to turn decisively in favour of affordable housing until fatigue sets in the premium and luxury categories, limiting further price hikes there. For now, despite the RBI's efforts to stimulate the economy through rate cuts, the affordable housing segment remains caught between weak borrower affordability on one side and low developer interest on the other. The revival of this critical sector requires more than just cheaper loans; it needs a concerted effort to address both supply-side cost pressures and demand-side income challenges.
