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Stimulus led growth shows signs of stabilisation in China; positive for global growth

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China’s latest macro data release brings a pleasant reprieve for global markets. While GDP growth of 6.4 percent in Q1 CY19 is a shade better than consensus, other economic data like retail sales and industrial production have fared better.

Chinese industrial production grew 8.5 percent year-on-year in March, where a faster clip was seen across sectors mainly commodities (metals and chemicals), machinery and transport equipment. For the first quarter of the year, industrial production rose 6.5 percent YoY.

Economic stabilisation on cards

Since it’s a single set of data, it’s early to say if a credible trend of economic recovery is in the making. Still it gives weight to recent assessment of the International Monetary Fund (IMF) that economic stabilisation is on the cards.

Recently, IMF modestly upgraded its 2019 growth outlook for China while it had majorly downgraded the assessment for other major economies. It expects global growth to gradually pick-up in second half of 2019 as ongoing buildup of policy stimulus in China should help.

What made it work?

Some factors that dragged Chinese growth, particularly investment, over the last few quarters have been the regulatory measures to control debt and shadow financial institutions, supply-side reforms leading to closing of various manufacturing units causing pollution and the US-China trade war. While the last factor is still taking shape, there has been an apparent relaxation on other factors recently.

Total social financing, a broad measure of credit and liquidity in the economy, surged to 8.2 trillion yuan in the first quarter compared 5.9 trillion yuan a year ago. Liquidity measures announced over last year in the form of Reserve Requirement Ratio (RRR) cuts have been supportive.

This justifies our earlier assessment that there seems to be a pause in deleveraging efforts and in fact the economy could re-leverage in 2019 after a decline in 2018. Statement from the China Banking and Insurance Regulatory Commission (CBIRC) underlined that deleveraging targets have been achieved and that leverage levels are expected to remain stable over the near term.

Capture1

What is concerning?

It’s noteworthy that China’s leverage ratio (debt-to-GDP ratio) was 244 percent in 2018, with corporate leverage ratio at 154 percent. Growing credit fuelled growth makes the sustainable economic recovery questionable. While credit growth seems to be helping real estate investment (11.8 percent YoY), fixed-asset investment is still mediocre at 6.3 percent in Q1. Consumer durables, particularly automobile and mobile sales, continue to witness de-growth over the last few months.  This means trends for both consumption and investment are still uninspiring.

So what next?

One needs to watch out for the impact of recently announced fiscal stimulus ($300 billion) on the economy. Monetary policy and credit measures seem to have jump-started the economy. However, given the leverage levels, onus is now on fiscal measures and global demand conditions. Recovery, in our opinion, is fragile and going forward is expected to be led by consumption. Having said that, recent data provides some reprieve from the key risk factor -- case of a hard landing in China.

Financial markets seems to have dumped the possibility of hard landing. Chinese local equity market has outperformed global markets in the last four months. The Shanghai index is up 33 percent from its December 2018 lows. Key Australia-based mining stocks such as BHP and Rio Tinto have also strongly performed in recent times, partly on hopes of a Chinese recovery.

Going forward, trade resolution between the US and China should help restore the supply-demand imbalance in commodities and possibly help mining stocks. A key positive takeaway from the relaxation in China supply-side reforms is that downstream industrial chemical companies in India may benefit from lower prices of key raw materials such as hydrofluoric acid, caustic soda and phenol.

UGC-AICTE merger proposal sent into cold storage

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The merger proposal between the University Grants Commission and All India Council for Technical Education has now been sent into cold storage due to a lack of consensus on the structure of the new entity.

The original proposal floated in 2017, included the merger of these two entities to form one higher education regulatory body.

“The proposal is not under consideration anymore. The structure of the merger was not agreeable by the parties,” said an official.

Officials from both the regulatory bodies were unable to come to a consensus on several issues: who would head the new body, how many members would be a part of the board as well as what actions would be taken against blacklisted institutions.

There was also a view that considering India would have more than 70,000 educational institutions, one single body would be unable to handle the huge volumes.

The two...

UGC is a body that helps to maintain standards in university education across the country. It was set up in 1956 and has decentralised its operations by setting up six regional centres at Pune, Hyderabad, Kolkata, Bhopal, Guwahati and Bangalore. UGC is headquartered in Delhi. Currently, there are 907 universities in India.

AICTE was set up in November 1945 as a national-level apex advisory body to conduct a survey on the facilities available for technical education and to promote development in the country in a coordinated and integrated manner. It serves as an accreditation body for engineering, management, hospitality and other technical institutes across the country.

Any institute in the engineering and management segment who wants to offer degrees/diplomas to students is required to be approved by AICTE.

... and their merger

Sources said the idea behind the merger of UGC and AICTE was to have one body in charge of accrediting all higher education institutions in the country. Most developed markets have a single regulatory body for approving the entry of new institutes as well as for maintaining the quality of education in the region.

A merger would have meant that each application for opening a new institute in the country would go to the Higher Education Regulatory Body. Depending on the type of the course, it would have either AICTE or UGC officials approving the programme.

India's steel exports dive more than a third during April-March

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India's finished steel exports fell more than a third in the 2018/19 fiscal year after the United States and Europe, the world's two biggest buyers of the alloy, imposed safeguard duties in the past one year.

Finished steel exports between April 2018 and March 2019 fell 34 percent from the previous year to 6.36 million tonnes. Finished steel imports by India, the world's fastest growing market, rose 4.7 percent to 7.84 million tonnes, leaving India as a net importer, preliminary government data showed on Friday.

Rupee bulls dig in as investors grapple with elections across Asia: Poll

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A tale of two elections saw investors raise their bullish bets on the Indian rupee over the past two weeks while long positions on the Thai baht unravelled to their lowest this year, a Reuters poll showed.

Foreign investors have ploughed billions of dollars into India ahead of an election process spread over seven phases and ending only toward the end of next month with nearly 900 million people eligible to vote. The process begins on Thursday.

Investors, who only turned bullish on the rupee at the start of March for the first time in nearly a year, have since raised their long positions to their highest since January of last year, the poll of 14 respondents showed.

The prospect that Prime Minister Narendra Modi and his party will manage to just about win a parliamentary majority has sparked net inflows of over $8 billion into equities so far this year as of April 9. More than half of the inflows occurred in March alone.

On the other hand, Thailand, which is still reeling from the fallout of uncertainty surrounding its election at the end of March, has seen investors unwind some of their long positions on the baht gradually built up during the first two months of the year.

The baht, however, still remains the best performing currency so far this year among its regional peers, gaining about 2.5 percent thus far.

Final results of the Thai election will be announced on May 9.

"Two-directional risk remains high and both currencies could still move either way depending on how the election news develops over the next few weeks," said Julian Wee, a South Asia investment strategist at Credit Suisse.

Graphic: Foreign Flows in lieu of Elections https://tmsnrt.rs/2DbHlvz

Indonesia, Southeast Asia's largest economy, also heads into elections next week with investors turning bullish on the rupiah once again after a month's hiatus.

Elsewhere, investors trimmed long positions on China's yuan to their lowest since turning bullish in January.

There has been progress towards a trade deal between China and the United States but U.S. officials say there are still important issues for the countries to address. However, the fallout from the months-long trade war has resulted in weak economic data, posing concerns for the health of the global economy.

In response, China has undertaken massive stimulus measures to reinvigorate its economy, which analysts at HSBC say will boost growth as it filters through in the coming quarters.

The Asian currency positioning poll is focused on what analysts and fund managers believe are the current market positions in nine Asian emerging market currencies: the Chinese yuan, South Korean won, Singapore dollar, Indonesian rupiah, Taiwan dollar, Indian rupee, Philippine peso, Malaysian ringgit and the Thai baht.

The poll uses estimates of net long or short positions on a scale of minus 3 to plus 3. A score of plus 3 indicates the market is significantly long U.S. dollars.

The figures include positions held through non-deliverable forwards (NDFs).

What the IMF says about the outlook for the Indian economy

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Looking for reasons for the slowdown in the Indian economy? The International Monetary Fund’s latest edition of its flagship publication -- World Economic Outlook -- provides us an important clue. It says falling commodity and crude oil prices provided an opportunity for the Indian economy in 2015 and 2016. These windfall gains amounted to a cumulative 4.3 percent of GDP in the two years.

In 2017 and 2018, though, commodity and crude oil prices edged higher, resulting in a cumulative drag of 2.3 percent of GDP on India’s growth. The forecast for 2019 and 2020: happy days are back, crude prices will weaken and India’s windfall gain will be an average of 0.34 percent of GDP for these years. And guess what -- India’s GDP growth went up in 2015 and 2016, fell in 2017 and 2018 and is projected to be higher again in 2019 and 2020.

The correlation with the ups and downs of crude oil prices is clear. Sure, there are a host of factors affecting growth, but what the data underlines is the importance of low crude oil prices for the Indian economy.

What else does the World Economic Outlook say about India? It says real GDP growth will move up to 7.3 percent in the current fiscal from 7.1 percent in 2018-19. Investment demand will see a minor recovery to 31.7 percent from 31.6 percent of GDP in 2018-19. That is nowhere near the 39 percent investment peak rate seen in 2011 and well below the 34 percent investment-to-GDP rate seen in 2014-15. There doesn’t seem to be much hope of a rapid turnaround in capital expenditure. The details are given in the accompanying chart.

IMF forecast for India

Inflation is expected to average 3.9 percent this fiscal, higher than last fiscal, but still below RBI’s target of four percent. That will keep interest rates low.

Interestingly, the IMF feels that the overall fiscal deficit, including that of states, is going to rise this fiscal to 6.9 percent from 6.7 percent last fiscal. Inflation is expected to remain under control in spite of the higher deficit.

In line with the IMF’s forecast that trade restrictions will lower global growth rates, India’s volume of exports of goods and services is expected to grow more slowly in 2018-19. Import volume growth, though, is expected to increase, probably as a result of higher growth.

One big reason why inflation will remain subdued is because average crude oil prices are forecast to be 13.4 percent lower this year. That kind of precision in predicting oil prices is impossible, but at least the IMF thinks they will be lower, which, as we have seen above, is a big relief for India. Non-fuel commodity prices too are expected to be soft this fiscal.

The IMF says, “Growth in India is expected to stabilise at just under 7.34 percent over the medium term, based on continued implementation of structural reforms and easing of infrastructure bottlenecks.” What do we need to do to sustain that growth rate? Says the WEO, “Continued implementation of structural and financial sector reforms with efforts to reduce public debt remain essential to secure the economy’s growth prospects. In the near term, continued fiscal consolidation is needed to bring down India’s elevated public debt. This should be supported by strengthening Goods & Services Tax compliance and further reducing subsidies.

“Important steps have been taken to strengthen financial sector balance sheets, through accelerated resolution of non-performing assets under a simplified bankruptcy framework. These efforts should be reinforced by enhancing governance of public sector banks. Reforms to hiring and dismissal regulations would help incentivise job creation and absorb the country’s large demographic dividend. Efforts should also be enhanced on land reform to facilitate and expedite infrastructure development.”

1.07 cr new taxpayers added, dropped filers down at 25.22 lakh in FY18:

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The Income Tax department said Thursday it added 1.07 crore new taxpayers while the number of ‘dropped filers' came down to 25.22 lakh in 2017-18, showing the positive impact of demonetisation.

In a statement, the Central Board Of Direct Taxes (CBDT) said 6.87 crore Income Tax Returns (ITRs) were filed during FY 2017-18 as compared to 5.48 crore ITRs filed during FY 2016-17, translating into a growth of 25 per cent.

Also, during FY 2017-18, the number of new ITR filers increased to 1.07 crore as compared to 86.16 lakh new ITR filers added during FY 2016-17, it added.

“Demonetization had a phenomenal positive impact on the widening of tax base and direct tax collections,” CBDT said.

Dropped Filers, which is defined as a person who was earlier in the filer base but has not filed return in any of the last three financial years, declined in 2017-18 to 25.22 lakh from 28.34 lakh in 2016-17.

"The net direct tax collections for 2017-18 amounted to Rs 10.03 lakh crore, which is 18% higher than the collections for 2016-17. The growth rate of 18 per cent for 2017-18 is the highest in the last seven financial years. A substantial part of this growth is attributed to the impact of demonetization,” CBDT said.

The government had in November 2016 demonetised high value currency notes of 500 and 1000 denominations to crack down on black money.

Got Rs 50,000 cr projects to Gautam Buddh Nagar since 2014: Mahesh Sharma

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With Gautam Buddh Nagar in Uttar Pradesh going to polls on April 11, BJP's Mahesh Sharma is a busy man these days, addressing meetings and public outreach programmes round the clock.

"Now one minute for me means 10 votes, and this ratio is only growing bigger," he said, settling for an early morning interview with PTI even as scores of people thronged his residence to meet him before he left for campaigning.

Sharma, 59, a native of Alwar in Rajasthan, has been living in Noida for 37 years now and finds himself emotionally connected with the people in Gautam Buddh Nagar, which elected him to the Lok Sabha with 5.99 lakh votes in 2014.

He is again contesting from the seat with rivals from the Samajwadi Party (SP) and Bahujan Samaj Party (BSP) alliance and the Congress, among others in the fray for the nearly 23 lakh votes.

"What is it that the people expect from their leader? The first is the candidate's party and the second is who is leading the party.

"This election is not about an MLA or an MP. This election is about deciding the leadership of the country, Sharma said alluding to Prime Minister Narendra Modi being a major factor among voters.

Modi is leading the country and the prime minister has taken the pride of India and Indians to new heights and to a stature that was imagined of it by sants and mahapurush", he said.

Certainly no other leader in India matches Modi in stature and I believe, world over he is among the few leaders who have made an identity for themselves, Sharma said.

Noting that his constituency has 1,186 villages, and around 400 colonies and housing societies, the Union minister for culture boasted of being one of the most approachable MPs.

Sharma is banking for votes on the exemplary development works done in the region in the last five years, including an international airport that is coming up in Jewar.

I think nobody else is as approachable as I am. I meet people till as late as 11-12 in the night and then in the morning again. I have never denied meeting anybody who comes to me.

"The work that I have done for my constituency in last five years, and what my party has done for the nation, are exemplary. I have been successful in getting projects worth Rs 50,000 crore in this region," he said.

The country's biggest airport, a Rs 12,000 crore power plant in Khurja, the first power plant in 15 years in UP. An elevated corridor for Rs 650 crore, a wide-network of metro rail which will reach up to Jewar, and also connect Ghaziabad and Faridabad are coming up here, the BJP leader said.

He also listed other projects in Noida and Greater Noida, including India's first botanical garden post Independence, works at Okhla bird sanctuary, the first museology institute outside Delhi, the country's first food craft institute and the Deendayal Upadhyay Institute of Archaeology, as achievements.

What is more significant is that we not only laid foundation stone of the projects, but inaugurated them as well, he remarked, adding his government has been quick.

However, he said a lot more is to be done and has plans to address problems related to law and order, road traffic, flat builders and buyers, and fee structure in schools, issues that have plagued the region adjoining Delhi for long.

Development is a process in continuity. Lot of work has been done but a lot more remains to be achieved, he said.

Sharma said farmers' issues lingering for 40 years are now getting resolved and so are those related to builders and buyers, as he squarely blamed the previous governments for causing distress to the two communities.

These are problems created by the last two governments. We constituted committees and RERA (Real Estate Regulation Authority) and empowered it (to take action), roped in the (state-run construction firm) NBCC to tackle all these problems.

"The guilty builders are either behind bars or being brought to justice, he said.

Sharma said there is a need to have a long-term solution for traffic problems. Private agencies are being roped in to identify the problems and come up with solutions, he said.

People have been demanding restoring of gram panchayats and establishing municipal corporation in cities, claiming approaching officers of Noida, Greater Noida or Yamuna Expressway authorities is not possible for locals.

My constituency has 1,186 villages, around 400 colonies. We make efforts to find solutions to everybody's problems. Nagar Nigam (municipal corporation) is subject of deep deliberation. It's not possible to instantly say if I support it or not, he said.

On employment, Sharma said with the law and order situation improving, the airport coming up and 40 corporate firms, which have already got land, set to arrive, one lakh job opportunities will be created in the region.

"These developments will also pave way for foreign investment. We will provide good governance and single-window clearance to enable industries set up business, he said, adding no big industry has come here in last 15 years, but today there is a conducive environment.

There are 13 candidates in the fray this time from Gautam Buddh Nagar, but Sharma is confident that with the work he has done he can ask people for votes.

On one side is the BJP, on the other are the SP and BSP in an alliance. They have robbed this region with open hands, the third is a Congress candidate who has come from Aligarh and has studied in the US.

"When all analysis is done, I think with the work done by my party and me, we are miles ahead of the competition, he added.

The SP-BSP have jointly named Satveer Nagar (37) as candidate and the Congress have fielded Arvind Kumar Singh (30) for the seat.

On if he thought he would win again and if yes would his vote margin increase, a confident and smiling Sharma gestured upwards with both hands (God) to say, Over 5 lakh new voters have joined the electoral role and the number has gone up close to 23 lakh.

What SC quashing RBI's February 12 circular means for banks, companies and IBC

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The Supreme Court’s (SC) judgement quashing RBI’s 12th February circular has come as a bolt from the blue. The circular was aimed at early recognition and resolution of stressed assets and making the Insolvency and Bankruptcy Code, 2016 (IBC) pivotal in the entire framework.

Post the February 12 circular, all pre-existing categorization of standard stressed assets – SDR, S4A, CDR restructuring, and flexible restructuring under 5:25 scheme stood abolished, leaving IBC as the only resolution mechanism.

Prior to the 12th February circular, the Banking Regulation Act was amended and under Section 35AA, the Reserve Bank of India (RBI) got the authority to direct banks to initiate insolvency resolution process in respect of a default, under the provision of the Insolvency and Bankruptcy Code (IBC), 2016.

Before assessing the probable impact of the SC judgement, it is important to understand the nuances of RBI’s February 12 circular.

RBI’s February 12 circular

The circular directed banks to identify incipient stress in loan accounts immediately on default, by classifying stressed assets as special mention accounts (SMA) as per the following categories, SMA-0 (1 to 30 days), SMA1 (31 to 60 days) and SMA-2 (61 to 90 days). Lenders were required to report SMA to Central Repository of Information on Large Credits (CRILC) on all borrower entities having aggregate exposure of Rs 5 crore and above on a monthly basis and all defaulting entities on a weekly basis.

While encouraging lenders to go for resolution, bankers felt that the conditions attached with the resolution plan (RP) were onerous. An RP was deemed to be ‘implemented’ only if the borrower entity was no longer in default with any of the lenders. For restructuring, the relevant documentation had to be completed by all lenders and the new capital structure had to get duly reflected in the books of all the lenders and the borrower.

For large accounts, post restructuring, the residual debt required independent credit evaluation by credit rating agencies authorised by the RBI.

For large accounts with aggregate exposure of over Rs 2000 crore, a reference day was set on March 1, 2018. If a resolution was not implemented within 180 days of the reference day or default day (if default day was later than reference day), lenders were required to file insolvency application under IBC within 15 days from the expiry of the said timeline.

Why the need for the February 12 circular?

Even in the face of mounting bad assets, banks were initially reluctant to refer even defaults to IBC and were resorting to different types of restructuring that in most cases made little sense. It neither nurtured the borrowing entity to health nor did it do any good to the lender except for postponing the problem.

The February 12 circular had put a definitive timeline by pushing defaulting cases to IBC. However, under the IBC framework, promoters cannot bid if he/she has furnished personal guarantee and if the period from default to admission into IBC exceeds one year. Section 29A under IBC virtually closed the doors of defaulting promoters to gain access to their companies.

Section 29A was introduced to ensure that persons who were responsible for the default of a company, or certain undesirable persons, did not acquire or regain control of a company by participating in the resolution process.

It is interesting to note that recently the Supreme Court has upheld all provisions of IBC including Section 29A, but it has quashed the February 12 circular.

The way forward

What this essentially means is that banks have more time to restructure a loan. However, the Supreme Court judgement doesn’t prevent a bank from referring a defaulter to IBC should it wish to do so.

For a defaulting promoter, it perhaps gives more time to enter into a restructuring arrangement with the lender without the onerous timeline of 180 days. For companies that have been impacted by adverse macro developments, this could provide some respite.

Finally, while the first list of NCLT cases has met with reasonable success, the same cannot be generalised for the long list of stressed companies. Many of them would be without tangible assets to find takers and for many smaller companies, there would be no takers beyond the promoter, as the real value of the business is best understood by the promoter. The normal IBC route would have resulted in liquidation of many smaller firms, with the attendant impact on jobs.

Whether the SC judgement provides a genuine breather remains to be seen. The follow-up action from RBI, should it come out with fresh guidelines on resolution and restructuring outside the IBC, would be keenly awaited.

March GST revenue crosses Rs 1 lakh crore, highest collection in FY19

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GST collection in March 2018-19 has been the highest ever since the introduction of the indirect tax regime with the government recording a 15.6 percent growth in revenue over 2017-18.

The total GST collections for March stood at Rs 1,06,577 crore. Of this, the total Central Goods and Services Tax (CGST) stood at Rs 20,353 crore, State Goods and Services Tax (SGST) collected was Rs 27,520 crore and Integrated Goods and Services Tax (IGST) was at Rs 50,418 crore.

IGST included Rs 23,521 crore worth of imports. Cess collected stood at Rs 8,286 crore. This included Rs 891 crore collected on imports.

The total revenue earned by the central and the state governments after regular and provisional settlement in the month of March was Rs 47,614 crore for CGST and Rs 51,209 crore for the SGST.

The total number of GSTR 3B returns, a tax return form necessary to be filed for GST registrants, filed for the month of February till March 31 was 75.95 lakh.

The revenue collected in March 2018 was Rs 92,167 crore. An average revenue of Rs 98,114 crore was collected each month in the financial year 2018-19, which was 9.2 percent higher than that collected in 2017-18.

"These figures indicate that revenue growth has been picking up in recent months, despite various rate rationalisation measures," Finance Ministry said in a statement on April 1.

Revenue collected in the last quarter of 2018-19 was 14.3 percent higher than that collected in the same period a year ago.

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