India’s growth indicators (Part II): Financial Conditions Index

November 14, 2019

Please see important disclaimer

at the end of this report

ICICI Bank’s Financial Conditions Index (FCI), shows that conditions have been easing since October 2018

Our analysis also establishes FCI as a lead indicator/predictor of GDP, implying that easing financial conditions seen

since the beginning of calendar year 2019, supplemented by fiscal reforms (including corporate tax cuts and sector

specific reforms) announced by the FM over the past couple of months could lead to growth recovery over the

medium term

On monetary policy, the higher than expected headline inflation print seen recently does not change our rate cut

view. We still expect a couple of rate cuts further in this cycle given our expectations that growth concerns would

take precedence over the breach of the 4% inflation target (driven mainly due to transitory factors) and threats of a

fiscal breach

ICICI Bank’s proprietary Financial Conditions Index (FCI) for India is constructed using the Principal Component Analysis

(PCA) and aggregates information represented by financial variables across four markets – Bonds, Forex, Money and

Rates, and Stocks. The index consolidates, often incongruous information, across these markets into a single index

representing overall financial conditions.

Our FCI indicates that financial conditions have been easing since October 2018, driven by 1) falling oil prices easing

conditions in the forex markets, 2) an accommodative Monetary Policy Committee (MPC), 3) central bank’s

commitment to provide adequate system liquidity and enable better monetary policy transmission, 4) easing conditions

in the bond and money markets and 5) a strong electoral mandate boosting sentiment in both the forex and equity

markets.

A minor tightening in financial conditions was seen in August because of increased global risk aversion amidst

escalating US-China trade tensions and domestic growth and fiscal concerns. While the former is subject to volatility

dependant on idiosyncratic political and economic relationships, recent announcements by the Finance Minister (FM),

including substantial cuts in corporate taxes, and sector specific reforms could be positive for domestic growth over

the medium term. Threats of a fiscal deficit breach on the back of the stimulus and sluggish economic growth has

soured sentiment in the bond markets, while expectations of further accommodation by the Monetary Policy

Committee (MPC), provision of adequate liquidity by the central bank and RBI’s directive mandating banks to use

external benchmarks for determining interest rate on floating rate loans, have been mitigating factors. Minor blips of

tightening could be seen in the forex markets on account of growing domestic growth concerns, Fed signaling little

need to cut interest rates further and continued uncertainty on trade wars; while some volatility could be seen in stock

market FCI, led by growth concerns. However, on the aggregate financial conditions should continue to be benign.

Our analysis also establishes FCI as a lead indicator/predictor of GDP. Using cross-correlation and Granger Causality

tests, we find that FCI is a lead indicator of GDP growth with financial conditions up to 3-4 preceding quarters affecting

GDP. In this context, current easing of financial conditions along with fiscal reforms announced by the FM could aid in

growth recovery over the medium term.

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Oct-

06

Oct-

07

Oct-

08

Oct-

09

Oct-

10

Oct-

11

Oct-

12

Oct-

13

Oct-

14

Oct-

15

Oct-

16

Oct-

17

Oct-

18

Oct-

19

Aggregate FCI

Great financial crisis

Taper tantrums

Brent crude hit USD 86/bbl

Easing

Conditions

Source: CEIC, Bloomberg, RBI, Reuters, ICICI Bank Research

Occasional

Treasury Research Group

For private circulation only

Anushri Bansal

anushri.bansal@icicibank.com

+91-22 4008-6220

Yash Panjrath

yash.panjrath@icicibank.com

+91-22 4008-8161

2

On monetary policy, while the most recent inflation print was higher than our expectations at 4.62% and pushes our

inflation forecasts for the current fiscal to average ~4% YoY (higher than MPC projections of 3.35% for the year) with H2

headline inflation expected to average ~4.8% YoY, we still maintain our view on further accommodation. This is under the

premise that MPC will focus on growth concerns (Q2 growth expected to be ~4.6% - 4.8% YoY, with a lower number not

ruled out) and be willing to overlook the breach of the 4% inflation target (driven mainly due to transitory factors) and fiscal

breach. Forward guidance will need to be more nuanced and clarity has to be given for prioritizing growth vs. inflation.

Some granular discussion about CPI trajectory and the fact that they could possibly look through a food inflation generated

spike has to be put across convincingly. Moreover, MPC’s tolerance of fiscal breach (becoming increasingly possible –

with our estimates showing a breach of 0.3-0.5% of GDP) and now being acknowledged by government officials will also

garner importance.

Given the poor GDP numbers in Q1 FY2020 and expectations of weak growth for Q2, we expect FY2020 GDP growth to

print closer to 5.5% YoY. However, we feel that a policy mix of easing monetary and fiscal policy, along with sector

specific reforms including for the realty sector, auto sector etc. will aid in growth recovery over the medium term. A key

headwind to the growth recovery which would need to be monitored are escalations in global trade wars and

synchronized growth slowdown globally, which would weigh on our exports and in turn GDP growth.

This is the second part of a two-part series, where we take a deeper dive to understand underlying drivers of growth in

India. While the first part created a diffusion index, which could be used to assess growth in the near term (India's growth

indicators (Part I)_Diffusion Index), in the second part we have created a financial conditions index, which would enable us

to understand the direction of growth in the medium term.

Introduction – FCI, an aggregator of financial conditions and a predictor for real economic activity

Financial Conditions Index (FCI) is an index that synthesizes information represented by financial variables across markets.

Stress in one market could transfer to the other market or be neutralised by favourable conditions in other markets,

creating contradictory signals. FCI helps aggregate financial conditions across markets, representing them through one

composite index. Moreover, the FCI can be treated as a lead indicator for future real economic activity as it is said to

summarize information about the future state of the economy contained in current financial variables. The predictive ability

of the index garners significance especially in uncertain and volatile times, providing a guide to the future direction of the

movement of the economy.

The rest of the paper is organized as follows: Section 1 talks about data and methodology of constructing the FCI and tests

to establish it as a lead indicator of economic activity, while section 2 takes us through movements in the aggregate FCI as

well as FCI of individual markets – bond, forex, money and rates, and stock markets. We also look at movements of

individual variables impacting each market and the bearing they have in driving financial conditions in that particular

market. In section 3, we establish the predictive ability of the FCI as a lead indicator of real economic activity, while we

finally conclude in Section 4.

Section 1: Data and Methodology

Financial markets in India can broadly be classified into four segments i) bond market, ii) money and rates market, iii)

foreign exchange market and iv) equity market. We use 20 economic variables to represent financial conditions in these

four markets and use them to calculate the Financial Condition Index for India. Our original data set consists of daily data

(apart from sovereign credit risk and money supply, which is in monthly frequency) from which we have created monthly

averages. Our data ranges from June 2006 to October 2019.

Following adjustments are made to the data before constructing the financial index:

1) Smoothening: Daily data could possibly contain more information but they also have more noise and idiosyncratic

shocks. Hence, to smooth the data, the daily average for each month is computed. Final data set consists of

monthly series of these 20 variables from June 2006 to October 2019.

2) Normalisation: The data is such that combining them in level forms could bias the index. For e.g. the India 10-yr

bond yield might not have comparable value to say the call spread. Hence, to standardize the data, we create z-

scores (standard normal variate) for each variable. We have also taken care that all variables are standardized in

terms of their directional impact on the index.

3

Computing Financial Condition Index using Principal Component Analysis

Principal Component Analysis (PCA): Given high correlation amongst the variables in our dataset, we use PCA to derive

weights to form the Financial Condition Index.

Financial Condition Index: Firstly, individual level FCIs are obtained using PCA on each sector. Resulting FCIs i.e. Bond

Market FCI, Forex Market FCI, Money Market FCI and Stock Market FCI are then used to arrive at the aggregate FCI for

India.

1. PCA is run on individual sector variables using E-views, after making some adjustments as explained above

2. Weighted average of first few PCs (where Eigen value is greater than 1) is taken, using Eigen values as weights

3. These weights are then multiplied by the sectoral variables to form individual sector FCI.

4. The aggregate FCI is then obtained by running PCA on sectoral FCIs.

Aggregate FCI: a synthesis of financial information across markets

0.00

0.05

0.10

0.15

0.20

0.25

0.30

Bond Market

FCI

Forex Market

FCI

Money Market

FCI

Stock Market

FCI

Aggregate FCI- PCA weights

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Oct-0

6

Oct-0

7

Oct-0

8

Oct-0

9

Oct-1

0

Oct-1

1

Oct-1

2

Oct-1

3

Oct-1

4

Oct-1

5

Oct-1

6

Oct-1

7

Oct-1

8

Oct-1

9

FCI Bond FCI Forex

FCI Money and Rates Market FCI Stock Market

Result Aggregate FCI

Source: RBI, CEIC, Bloomberg, Reuters, ICICI Bank Research

4

Section 2: Financial Conditions Indices – How are they faring?

Bond market FCI – We use the 10-year G-sec yields, 10-year corporate bond spreads, SBI 5-year CDS rate (as a proxy for

sovereign credit risk) and India-US 10-year interest rate differential to construct the bond market FCI. Our PCA analysis

shows that the bond market is most influenced by sovereign credit risk, followed by government bonds both at the short

end and long end. We find that periods where financial conditions in the bond market tightened significantly include

August 2008, November 2011, and October 2013. While August 2008 was in the run-up of the Lehman crisis, which saw

most indicators see adverse movements, the spike in November 2011, was because of repo rates moving to highs of

8.5%, reflecting in the 10-year benchmark as the economy faced very high inflation with weak growth. Tightening

conditions were also seen through the increase in interest rate differentials between India and US and a spike in sovereign

credit risk. The spike in October 2013 was led by the Taper Tantrum, where the then Fed Chief had announced in May

2013 the intention to roll back the quantitative easing program that the Fed had embarked in response to the Great

Financial Crisis (GFC) (2007-2009).

More recently bond markets have been trading cautiously with fears of fiscal breach on the back of a stimulus and

sluggish economic growth, leading to upside risks. However, expectations of further accommodation by the Monetary

Policy Committee (MPC), provision of adequate liquidity by the central bank and RBI’s directive mandating banks to use

external benchmarks for determining interest rate on floating rate loans, could enable further easing in financial

conditions.

Forex market FCI – We use the USDINR, Bank of International Settlements (BIS) broad trade weighted nominal effective

exchange rate (NEER), the 3-month implied volatility in the USDINR and Forex CMax1 to construct the forex market FCI.

Our PCA analysis shows that the forex market is most influenced by Forex CMax and USDINR, followed by NEER and the

three-month implied volatility in the USDINR. The forex market in India is subject to vagaries of the external sector,

including global growth concerns, hot money flows and oil prices. This exposes our forex markets to substantial volatility,

which is reflected in several episodes of tightening seen in the financial conditions. We find that periods where financial

conditions in the forex market tightened significantly, include the aftermath of the GFC in the second half of 2008, between

2011-2012 (during this period oil prices averaged over USD 100/bbl. and current account deficit moved above 3.5% of

GDP), and more recently around September - October 2018, when oil prices breached USD 80/bbl.

Post the spike seen in September-October 2018, oil prices have mean reverted to average ~USD 63.5/bbl. from November

2018 – October 2019 (despite the drone strikes in mid-September on two major Saudi oil facilities, disrupting ~6% of

global supply), led by global growth concerns gaining importance amidst escalating trade war fears. However, despite

falling oil prices, escalation of US-China trade war conflicts, geo-political concerns and global risk aversion impacted

currency markets led by CNY devaluation, breaching the 7.00 mark in the beginning of August. This had ripple effects on

most of EM currency including the USDINR and led to a sharp tightening in financial conditions. Some of these volatile

triggers saw easing, leading to ranged trading of the USDINR in October. However, growing domestic growth concerns,

Fed signaling little need to cut interest rates further and continued uncertainty on trade wars could lead to some

depreciation bias with our expectations of USDINR ranging between 70.0-73.0 (with possible intermittent breach of our

upper target of 73.0) in the near term, leading to slight tightening of financial conditions in the forex markets. Post that we

expect mean reversion of financial conditions (barring any untoward global triggers) in the forex markets, given that Q4 of

the fiscal year is generally a seasonally strong quarter for the Rupee.

Money and rates market FCI – We use the call spread, Triparty repo spread (earlier CBLO), market repo spread, short rate

spread, money supply, 5-year MIFOR swap and 5-year INR OIS rates to construct the money and rates market FCI. Our

PCA analysis shows that the money and rates market is most influenced by triparty repo spread, call spread, followed by

the short spread and INR OIS 5-year. The money and rates market saw substantial volatility during the GFC and later

during the taper tantrums. However, strong commitment by the central bank to 1) support growth through lowering

policy rates in light of benign inflation, 2) aid transmission through adequate system liquidity, 3) as well as easing cycle of

most global central banks in particular the Fed, is leading to easing financial conditions in the money and rates markets

since the beginning of the year. More recently, mid-September saw some tightening in financial conditions, because of

threats of fiscal breach at the back of fiscal stimulus announced by the FM, headwinds of weak economic activity are also

impacting growth in broad money supply. However, we expect overall financial conditions to remain benign for the

money and rates market as MPC continues of its path of accommodation along with provision of adequate liquidity.

Stock market FCI – We use the PE ratio, stock market capitalization, NSE returns, foreign equity flows, and volatility in

stock market returns to construct the stock market FCI. Our PCA analysis shows that the stock market is most influenced

by PE ratio, followed by market capitalization, NSE returns, volatility in stock market returns, and foreign equity flows.

1 Forex CMAX = Xt / Max Xj (j = 0, -1,-2,-3 up to 1 year) ; "Forex CMax is described as the ratio of the value of the exchange rate at

time t and the maximum value of the exchange rate during the last one year; This ratio is upper bound at one, a value which is

witnessed during relatively stressed times.

5

The stock market FCI saw increased tightening during the GFC and taper tantrums as expected, led by fall in PE ratio,

market capitalization, high volatility and massive FPI equity outflows to the tune of USD ~13 bn (calendar year 2008) and

USD 3.8 bn (June – August 2013).

Last few months, stock markets have faced by substantial volatility, driven by growing risk aversion globally, increased

policy uncertainty as well as domestic growth concerns. This has led to fall in PE ratio’s and market capitalization as well

as foreign equity outflows to the tune of ~USD 4.1 bn (July -August, 2019), leading to tightening of financial conditions in

the stock markets. While there has been a reversal in sentiment post the corporate tax cuts announcements by the FM

and other measures including removal of surcharge on FPI investment and sector specific reforms which is now reflecting

in the stock market FCI, some volatility could be seen in this market on account of growth concerns leading to some knee-

jerk reaction.

Aggregate FCI – After having looked at individual market FCIs we look at the movements of the aggregate FCI, which is

constructed using the respective market FCI’s – bond, forex, money and rates, and stock. Our PCA analysis shows that the

aggregate FCI is most influenced by forex and stock market FCI, followed by bond and money and rates market FCI. As

expected, the aggregate index saw extreme tightening during the GFC and taper tantrums, during which financial

conditions in all markets tightened. However, what is also interesting is that there are instances when different markets

could give contradictory signals or could differ in magnitude even if moving in the same direction. This is seen recently, in

the month of August 2019, where bond and rates markets are showing signs of easing, contradicted by forex and stock

markets reflecting tightening conditions. Moreover, the next couple of months could see tightening in forex markets led by

USDINR depreciation, and slight volatility in the stock markets led by growth concerns, while other markets continue to

see easing in financial conditions. These incongruities underscore the need for a composite index that takes into account

the movements of all markets to provide a comprehensive outlook on financial conditions.

Section 3: FCI – A lead indicator for economic activity

In this section, we establish usefulness of FCI as a lead indicator or its predictive ability for economic activity. We do this

through 1) correlation analysis to see whether co-movements between FCI and real economic activity exist 2) Granger

causality tests to check whether FCI impacts real economic activity and not vice versa. We use real GDP growth excluding

agriculture and government spending as a proxy for economic activity.

Strong correlation between FCI and GDP growth – Our correlation analysis finds that FCI and GDP growth are correlated

contemporaneously. Moreover, 1 quarter and 2 quarter FCI lags show high, statistically significant correlation to GDP

growth. On the other hand, lags in GDP growth do not show significant correlations to FCI. These cross-correlations

show that FCI is a lead indicator of GDP growth rather than the other way around.

Granger causality tests show that FCI impacts GDP growth and not vice versa - Granger causality shows that the causality

is unidirectional from FCI to GDP indicating that FCI helps predict GDP but the reverse causality is not statistically

significant. Results show that financial conditions up to three-four preceding quarters could affect GDP activity, with its

impact falling post that.

Section 4: Easing financial conditions and fiscal policy stimulus could enable growth in the medium term

What these results imply for us in today’s context is that easing in financial conditions since the beginning of the year

could assist in growth recovery over the medium term. Monetary policy accommodation through 135 bps cumulative

Repo rate cuts done by the MPC since February 2019, as well as the central banks’ commitment to maintain adequate

system liquidity to aid monetary policy transmission could be considered as apposite steps taken by the central bank to

support growth. In this context, RBI’s directive mandating banks to use external benchmarks for determining interest rate

on floating rate loans, could enable further easing in financial conditions. Minor blips of tightening could be seen in the

forex markets on account of growing domestic growth concerns, Fed signaling little need to cut interest rates further and

continued uncertainty on trade wars; while some volatility could be seen in stock market FCI, led by growth concerns.

However, on the aggregate financial conditions should continue to be benign.

The Finance Minister came out and delivered bold tax reforms in the form of corporate tax cuts from 30% to 22%, with the

new effective tax rate at 25.17%, inclusive of surcharge and cess, and exemption from Minimum Alternate tax (MAT).

Moreover, corporate tax rates for new manufacturing investments has been reduced to 15% from 25%. The effective tax

rate at 17%, with no MAT, is more attractive compared to most other EM peers and should attract fresh FDI as well. This is

in addition to the sector wise measures announced by the FM to boost consumption demand and sentiment would assist

in boosting growth going ahead.

6

On monetary policy, while the most recent inflation print was higher than our expectations at 4.62% and pushes our

inflation forecasts for the current fiscal to average ~4% YoY (higher than MPC projections of 3.35% for the year) with H2

headline inflation expected to average ~4.8% YoY, we still maintain our view on further accommodation. This is under the

premise that MPC will focus on growth concerns (Q2 growth expected to be ~4.6% - 4.8% YoY, with a lower number not

ruled out) and be willing to overlook the breach of the 4% inflation target (driven mainly due to transitory factors) and

fiscal breach.

Some granular discussion about CPI trajectory and the fact that they could possibly look through a food inflation

generated spike has to be put across convincingly. Moreover, MPC’s tolerance of fiscal breach (becoming increasingly

possible – with our estimates showing a breach of 0.3-0.5% of GDP) and now being acknowledged by government

officials will also garner importance.

Given the poor GDP numbers in Q1 FY2020 and expectations of weak growth for Q2, we expect FY2020 GDP growth to

print closer to 5.5% YoY. However, we feel that a policy mix of easing monetary and fiscal policy, along with sector

specific reforms including for the realty sector, auto sector etc. will aid in growth recovery over the medium term. A key

headwind to the growth recovery which would need to be monitored are escalations in global trade wars and

synchronized growth slowdown globally, which would weigh on our exports and in turn GDP growth.

Bond Market FCI: driven by sovereign credit risk and government bonds, at the long- end and short-end

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Oct-0

6

Oct-0

7

Oct-0

8

Oct-0

9

Oct-1

0

Oct-1

1

Oct-1

2

Oct-1

3

Oct-1

4

Oct-1

5

Oct-1

6

Oct-1

7

Oct-1

8

Oct-1

9

Bond Market FCI

0.00

0.05

0.10

0.15

0.20

0.25

0.30

10-year

Gsec

10-year

corporate

spread

3-month T-

bill

India-US

rate

differential

Soverign

credit risk

Bond Market FCI- PCA weights

6.0

6.5

7.0

7.5

8.0

8.5

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

10-year Gsec(%)

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

10-year corporate spread (%)

Source: CEIC, Bloomberg, RBI, Reuters, ICICI Bank Research

7

Source: CEIC, Bloomberg, RBI, Reuters, ICICI Bank Research

4.8

5.2

5.6

6.0

6.4

6.8

7.2

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

(%) 3-month T-bill

4.2

4.4

4.6

4.8

5.0

5.2

5.4

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

India 10 yr - US 10 yr

(%)

60.0

80.0

100.0

120.0

140.0

160.0

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

SBI 5 year CDS rate

8

Forex Market FCI: driven by movements in the USDINR pair

Source: RBI, CEIC, Bloomberg, Reuters, ICICI Bank Research

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Oct-0

6

Oct-0

7

Oct-0

8

Oct-0

9

Oct-1

0

Oct-1

1

Oct-1

2

Oct-1

3

Oct-1

4

Oct-1

5

Oct-1

6

Oct-1

7

Oct-1

8

Oct-1

9

Forex Market FCI

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

3-month

implied

volatility

Forex CMAX NEER USD/INR

Forex Market FCI- PCA weights

5.0

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

(%) USDINR 3-month implied volatility

0.91

0.92

0.93

0.94

0.95

0.96

0.97

0.98

0.99

1.00

1.01

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

Forex CMAX

70.0

71.0

72.0

73.0

74.0

75.0

76.0

77.0

78.0

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

INR NEER

62.0

64.0

66.0

68.0

70.0

72.0

74.0

76.0

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

USDINR

9

Money and Rates Market FCI: driven by call rate and repo rate

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

Oct-0

6

Oct-0

7

Oct-0

8

Oct-0

9

Oct-1

0

Oct-1

1

Oct-1

2

Oct-1

3

Oct-1

4

Oct-1

5

Oct-1

6

Oct-1

7

Oct-1

8

Oct-1

9

Money and Rates Market FCI

-0.20

-0.10

0.00

0.10

0.20

0.30

0.40

0.50

Call

Spread

Market

Repo

Spread

Triparty

Repo

Spread

5-year

MIFOR

Money

Supply

INR OIS

5-year

Short

Spread

Money and Rates Market FCI- PCA weights

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

Call Spread(%)

-2.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

Triparty Repo Spread (%)

Source: RBI, CEIC, Bloomberg, Reuters, ICICI Bank Research

10

Source: RBI, CEIC, Bloomberg, Reuters, ICICI Bank Research

5.00

5.25

5.50

5.75

6.00

6.25

6.50

6.75

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

Repo rate (%)

5.5

6.0

6.5

7.0

7.5

8.0

8.5

9.0

9.5

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

FIMDA MIFOR 5 year rate(%)

130

135

140

145

150

155

160

165

9.0

9.4

9.8

10.2

10.6

11.0

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

Money Supply- M3 (% YoY) (INR tn)

4.5

5.0

5.5

6.0

6.5

7.0

7.5

8.0

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

INR OIS 5 yr(%)

0.3

0.8

1.3

1.8

2.3

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

Short Spread (3m CP - 3m t-bill)(%)

11

Stock Market FCI: led by PE ratio and stock market capitalisation

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Oct-0

6

Oct-0

7

Oct-0

8

Oct-0

9

Oct-1

0

Oct-1

1

Oct-1

2

Oct-1

3

Oct-1

4

Oct-1

5

Oct-1

6

Oct-1

7

Oct-1

8

Oct-1

9

Stock Market FCI

0.00

0.05

0.10

0.15

0.20

0.25

0.30

0.35

Stock market

capitalization/ GDP

Net foreign equity

investment

Volatility in stock

market return

NSE Returns PE Ratio

Stock market FCI- PCA weights

0.6

0.7

0.7

0.8

0.8

0.9

0.9

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

Stock market capitalisation to GDP ratio

-4000

-2000

0

2000

4000

6000

8000Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

(USD mn) Net foreign equity investment

Source: RBI, CEIC, Bloomberg, Reuters, ICICI Bank Research

12

Source: RBI, CEIC, Bloomberg, Reuters, ICICI Bank Research

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

Volatility in stock market return(%)

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

NSE Returns(% YoY)

24.0

25.0

26.0

27.0

28.0

29.0

30.0

Oct-1

7

Dec-17

Feb

-18

Ap

r-18

Jun

-18

Au

g-18

Oct-1

8

Dec-18

Feb

-19

Ap

r-19

Jun

-19

Au

g-19

Oct-1

9

NSE PE ratio

13

FCI as a lead predictor of economic activity

Quarterly FCI FCI Lag 1 FCI Lag 2 FCI Lag 3 FCI Lag 4

Core GVA -0.43 -0.61 -0.51 -0.18 0.17

t-stat -2.62 -4.05 -3.19 -1.05 0.94

Core GVA Lag 1 -0.22 -0.49 -0.61 -0.53 -0.20

t-stat -1.29 -3.02 -4.00 -3.32 -1.14

Core GVA Lag 2 -0.14 -0.28 -0.48 -0.64 -0.55

t-stat -0.74 -1.57 -2.85 -4.04 -3.31

Core GVA Lag 3 -0.06 -0.18 -0.27 -0.51 -0.66

t-stat -0.34 -0.96 -1.46 -2.90 -4.00

Core GVA Lag 4 0.01 -0.11 -0.17 -0.29 -0.52

t-stat 0.04 -0.57 -0.90 -1.55 -2.93

Source: E-views, ICICI Bank Research

Number

of obs.

FCI as a

predictor of GVA

GVA as a

predictor of FCI

Lag 1 51

F-Stat 5.42 1.14

P-Value 0.02 0.29

Lag 2 50

F-Stat 3.06 0.58

P-Value 0.06 0.57

Lag 3 49

F-Stat 3.23 0.87

P-Value 0.03 0.47

Lag 4 48

F-Stat 2.59 0.82

P-Value 0.05 0.52

Lag 5 47

F-Stat 2.46 1.30

P-Value 0.05 0.29

Lag 6 46

F-Stat 1.91 1.27

P-Value 0.11 0.30

Source: E-views, ICICI Bank Research

14

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