Inflation’s climb raises fears of more rate hikes as it spells doom for developers

Is the inflation going to be controlled by the numerous rate hikes or is it going to keep rising and continue eating into the margins of real estate developers??? Inflation is worrying the real estate developers as another rate hike could spell disaster to the already falling margins and slowdown in the property market.
ANNUAL inflation based on wholesale prices raced past the 12% mark in the week ended July 26, fuelled by costlier manufactured products, fuels and food items other than vegetables. Vegetable prices fell 8% from the year-ago period. Prices rose 0.1% from the week ended July 19.

In the previous week, wholesale prices had risen 11.98% from their level a year ago and by 11.89% in the week before that. Inflation, at a 13-year high of 12.01% in July 26 compared to 4.7% in the corresponding period a year ago, is likely to prompt RBI to further tighten monetary policy to reduce spending, economists said. Suggesting that inflation may be understated, the government revised the annual inflation figure reported in the last week of May by a whopping 0.52% to 9.32%.

Annual inflation in manufactured products, which have the highest weightage of 64% in the wholesale price index, rose 10.74%, while primary articles—with a weightage of 22%— gained 10.3% in the same period. RBI may hike rate in October

PRICES of items in the fuel, power, light and lubricants category shot up by over 17%, while prices of processed food items gained by 13.6%. The saving grace is vegetable prices, which eased by 8%.

“Inflation may peak in November-December and slip into single digits by March 2009. There may be another round of monetary tightening, going by the current price situation,” said Prime Minister’s economic advisory council member Saumitra Choudhury. The fastest price gains since 1995 have prompted the central bank to raise interest rates three times in two months to reduce consumer spending. “The central bank has already pressed the monetary brakes very hard. Depending upon oil prices and money supply in the system, RBI may lift its repurchase rate by 25 basis points in its October policy,” said DK Joshi, director and principal economist at Crisil, the local unit of Standard & Poor’s.

RBI had, last week, raised the benchmark rate at which it lends short-term money to banks by half a percent to a seven-year high of 9% and increased the reserve requirements for banks by 0.25% to 9%. RBI governor YV Reddy had said while revising the rates that the central bank would attempt to bring down inflation from the current level of about 11-12% to a level close to 7% by March 31, 2009. High cost of borrowing has already started showing in economic indicators like industrial production and capital goods production. Industrial output had declined sharply to 5% in the first two months of this fiscal from 10.9% in the same period a year ago.