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Kerala set to gain from rupee’s fall against dollar; growth of NRI deposits may pick up

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Apart from the rupee’s depreciation, the increase in interest rates may help bring more NRI deposits to banks in the second half of the year

Kerala, with its diaspora all over the world, stands to gain from the continuing depreciation of the rupee against the dollar and West Asian currencies, which is expected to bolster remittances to the state and reverse a trend of slowing growth of such deposits, experts said.

A recent notification allowing non-resident Indians to send up to Rs 10 lakh to relatives in India without informing the government is another factor that may support this trend.

Kerala used to account for 19 percent of total remittances to India a few years ago. Though remittances to India grew to $87 billion last year from $83 billion in 2020, as per World Bank data, inflows to Kerala suffered after the outbreak of Covid-19 because of widespread job losses and the return of workers from the Gulf countries, which account for almost 90 percent of 3.4 million Keralites living abroad.

The World Bank report projected that remittances to India will grow 3 percent to $89.6 billion in 2022, with the slower pace reflecting the drop in overall migrant stock. But will the depreciating rupee change the trend?

Remittances to Kerala have started rising as the rupee drops to new lows. Although the increase is not much now, the inflows may pick up further. Additionally, growth of NRI deposits in Kerala’s banks has slowed, suggesting that people appear to be spending remittance money more instead of retaining them in banks. This trend may change as interest rates rise.

Marginal increase

There is a marginal increase in the volume of remittances, partly due to the holiday season in the Gulf countries and partly on account of weakness in the rupee, a senior executive of Lulu Financial Holdings said. The rupee closed at 79.60 to the dollar on July 12, a new low.

“Under the prevailing situation, the trend might continue for some more time. People are waiting for further depreciation of the rupee. This includes high net worth individuals whose transactions are of higher value and investors who might be waiting for the rupee to test the Rs 80 mark,” the executive said.

Non-resident Keralites in the US and Europe are also cashing in on the situation.

“They don’t usually remit money regularly, but occasionally send money to their families. They have also begun to remit money now. We have seen them pledging gold for money to send to India on earlier occasions,” said Bijimon, head of the money transfer division at Muthoot Finance.

The Kerala government said last year that about 1.5 million non-residents had returned to the state following the outbreak of the pandemic. Experts said many of them have since returned.

In their paper Kerala Return Emigrant Survey 2021: What Next for Return Migrants of Kerala?, S Irudaya Rajan, founder chairman of the International Institute of Migration and Development, and Balasubramanyam Pattath, a research fellow at the institute, said about 50 percent of distressed return emigrants to the state wanted to re-emigrate, while 32 percent decided to seek work in Kerala or retire, possibly due to the negative experience encountered during Covid-19.

Remittances are crucial to Kerala as they account for 36.3 percent of the state’s GDP, unlike other states, which may have more migrants overseas.

According to a survey in the paper, 75 percent of return emigrants sent remittances home, the most common reason being debt payments (30 percent), followed by household expenses (25 percent), periodic investments (21 percent), and maintenance (12 percent).

The survey found an overall increase in monthly remittances since Covid-19 started, indicating resilience among more than 70 percent of the sample. However, the number of distressed emigrants sending remittances waned at larger amounts pre- and post-Covid-19 lockdowns, indicating a cash crunch due to job losses, withholding of wages, and the use of savings towards repatriation.

Gulf situation better

However, the situation is improving in the Gulf countries. The Lulu Financial Holding executive said economic activities are picking up in the Gulf region.

“The stimulus of the UAE government has been a big support for businesses to make a comeback. Even the Expo 2020 and resulting tourism and business deals have played a vital role in the recovery and we can see great signs of steady growth and 2022 would be a remarkable year,” he said.

Remittance flows from the US and Europe have been affected more by the Russia-Ukraine conflict than the pandemic. In recent times, there has been a slight increase in euro remittance volumes. However, people may be waiting for the euro to weaken further before remitting money home, he said.

The executive reckoned the recent amendment to the Foreign Contribution Regulation Act (FCRA) that allows NRIs to send as much as Rs 10 lakh instead of Rs 1 lakh to relatives in India without informing the government will facilitate the free transfer of funds. If the amount exceeds the limit, individuals have three months to inform the government instead of 30 days earlier.

Earlier, a large chunk of remittances went to banks as NRI deposits. However, the growth of NRI deposits in Kerala slowed last year, probably because of economic distress.

Total NRI deposits in banks grew 3.7 percent year-on-year to Rs 2,38,408 crore in FY22, following a 10 percent increase to 2,29,636 crore in FY21.

“Moreover, the outflow from banks has increased. People are not keen to retain money in the banks. Maybe they are using it for business purposes,” said Ajayakumar, AGM, NRI, at State Bank of India.

He said the trend will likely reverse as banks have started revising interest rates upwards for both rupee and foreign currency non-resident accounts.

“The rupee depreciation and the hike in interest rates may bring more NRI deposits to banks in the second half of the year,” he said.

Rupee at record low as US dollar surges globally, domestic markets fall

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Fears of a global recession weigh on the unit despite RBI measures to boost dollar inflow.

The  weakened to a fresh low against the US  on Tuesday as the greenback surged to a 20-year high globally and domestic equities suffered losses, dealers said.

The  was Tuesday morning trading at 79.61 against the US  versus its close of 79.44 on Monday.

The US  index, which measures the unit against six major currencies, was at 108.42 this morning, as against 107.67 on Monday. The index was at levels last seen around August 2002, Bloomberg data showed.

At 10:40 am IST, the BSE Sensex and the NSE Nifty were trading 0.3 per cent and 0.4 per cent lower, respectively.

The dollar has been on a strengthening spree of late as worries over slowing global economic growth amid an energy crisis in Europe and aggressive rate hikes by the Federal Reserve have sent investors rushing to the safety of the US .

In 2022, the  index has gained 13 per cent. The  has depreciated 6.6 per cent versus the dollar over the same period.

The broad dollar strength comes at a time when record outflows of overseas investment and elevated crude oil prices have rendered the outlook on India’s current account deficit unfavourable.

The  (RBI) has announced a slew of measures to ease pressure on the rupee, but  traders predict an unfavourable near-term outlook for the domestic  amid global headwinds.

The RBI, on Monday, permitted the international trade settlement in rupees, a move that could be aimed at facilitating transactions with Russia, analysts said. Last week, the central bank announced relaxations in overseas investment in government securities as well as sums raised abroad through External Commercial Borrowings.

“In the recent past,  has taken steps that could ease the pressure on the rupee viz-a-viz country’s deficit. However, so far the positive impact of the same hasn’t yet been translated into the USDINR pair given by overpowering glooms and the risk-averse environment globally,” said Amit Pabari, managing director at CR Forex Advisors, in a note.

“The given fundamentals shall likely sustain its pressure on the rupee keeping the upside open well in place. As the pair breaks its crucial 79.50 levels, it’s a little far from the next big figure 80.00 levels that could be seen in the short run,” he said.

Japan set to expand energy transition support to India

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Japan's 'Asia Energy Transition Initiative' initially targeted supporting countries in the Association of South East Asian Nations (ASEAN) pushing towards net-zero carbon emissions, including $10 billion in finance for renewable energy, energy efficiency and liquefied natural gas (LNG) projects.Japan Set To Expand Energy Transition Support To India Amid Crisis

Japan plans to provide support to India to drive the transition to clean energy, expanding a programme it launched last year for Southeast Asian nations, Industry Minister Koichi Hagiuda said on Wednesday.

Japan's 'Asia Energy Transition Initiative' initially targeted supporting countries in the Association of South East Asian Nations (ASEAN) pushing towards net-zero carbon emissions, including $10 billion in finance for renewable energy, energy efficiency and liquefied natural gas (LNG) projects.

"Specific support includes support for ASEAN countries in the Asian roadmap towards carbon neutrality, which will be expanded to include India," Hagiuda said at the Sydney Energy Forum, co-hosted by the Australian government and the International Energy Agency.

Hagiuda said the region needs to work on diversifying where it gets its energy from, in light of the ongoing energy crunch due to loss of Russian energy supplies.

"Against that backdrop, considering the current energy crisis, stable energy supply and market stability are critical as the basis for promoting a transition towards carbon neutrality," Hagiuda said.

For that we must engage in improving our energy independence through things such as a further push for diversification of energy sources of supply."

Ahead of his trip to Sydney for talks with Quad partners Australia, India and the United States, Hagiuda said on Tuesday he would press the United States and Australia to boost LNG output and stable supply to Japan.

He made no comment in his speech about the outcome of those talks which took place earlier on Wednesday.

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