After slashing the benchmark repurchase rate by a more-than-expected 50 basis points last month to a four-year low, Reserve Bank of India Governor Raghuram Rajan on Oct. 8 eased mortgage rules, allowing lenders to set aside less capital to cover home-loan default risks, effectively helping lower their cost of funds.

Rajan’s policies are starting to show results in a boost to Modi’s plan for 20 million homes by 2022 under his “Housing for All” program. State Bank of India, the country’s biggest lender by assets, says it is assessing the impact of the reduction in risk weights and may consider further decreasing borrowing costs for home buyers after already dropping its housing loan rates last month.

“Reduction in interest rates along with the increased loan-to-value ratio will help in growing home loans at a faster pace," Jayanthi Lakshmi, SBI’s chief general manager for real estate, habitat and housing development said in an interview. “In a market like India, where mortgage penetration is low, this will help in expanding the market.”

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Home sales in India’s top eight property markets fell 4 percent in the quarter through June from a year earlier, while unsold inventory rose by 18 percent, according to research firm Liases Foras, which estimates it will take at least 45 months to find buyers for unsold homes in Mumbai alone.

The 13-member S&P BSE India Realty Index has declined 7.2 percent this year. Shares of DLF Ltd., the country’s largest developer by market value, have slipped 2.1 percent in the period, while those of Poddar Developers Ltd., a builder of affordable homes in the outskirts of Mumbai, have advanced 21 percent.

Rohit Poddar, managing director of Poddar Developers, says the steps are in the right direction because non-performing assets in home loans across segments are less than 1 percent and a small fraction of the overall soured debt. 

Still, they aren’t enough to boost demand until the full benefits are passed on to the home buyer, he said, ....