INDEXThe Financial Conditions Index by ICICI Bank

The Diffusion Index by ICICI BankThe Business Resumption Index by ICICI Bank

INDICESINDICESINDICESThe Economy through the lens of ICICI BankThe Economy through the lens of ICICI BankThe Economy through the lens of ICICI Bank

INDEXThe Financial Conditions Index by ICICI Bank

The Diffusion Index by ICICI BankThe Business Resumption Index by ICICI Bank

OBJECTIVE

It is often difficult to gauge the direction in which economic activity is moving and at times of uncertainty it becomes even more difficult. In an attempt to palliate these uncertainties and provide a mirror of activity on an (almost) real-time basis we introduce a suite of indicators that help assess conditions both in the financial markets and the real economy. Our aim is to help the Bank leverage these indices to enable clients with a clearer picture of ongoing financial/economic conditions.

OUR FAMILY OF INDICATORS INCLUDE:

WHAT IS i4 MARKETS INDEX?

i4 Markets Index is an index that synthesizes information represented by financial variables across markets. A co-incidental indicator of financial conditions and a lead indicator for economic activity.

WHY IS IT REQUIRED?

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

WHAT DOES IT ASSESS?

Financial Conditions Index is said to summarize information about the future state of the economy contained in current financial variables.

The Financial Conditions Index by ICICI Bank

ICICI PROPRIETARY FINANCIAL CONDITIONS INDEX

Our Financial Conditions Index has been constructed by first creating indices for 4 financial markets - bond, money, equity, forex – and then by compiling the 4 sub-indices into an Aggregate Financial Conditions Index. We use an econometric technique called the principal component approach (PCA), that helps in assigning weights to underlying variables used to construct the index.

Our analysis also establishes Financial Conditions Index as a lead indicator/predictor of GDP. Using cross-correlation and Granger Causality tests, we find that Financial Conditions Index is a lead indicator of GDP growth with financial conditions up to 3-4 preceding quarters affecting GDP. Our tests also establish that causality is unidirectional from Financial Conditions Index to GDP indicating that Financial Conditions Index helps predict GDP and not the other way round.

A LEAD INDICATOR FORECONOMIC ACTIVITY

HOW DO WE READ THE INDEX?

Since all the Financial Conditions Indices are based on standardised scores, stress (tightening conditions) could be defined as all values above Zero, while easing conditions are all values below Zero.

Moreover, two sub-indices are non-comparable (Bond market vs. Stock market Financial Conditions Index for example) although the direction of movement signifies change in stress.

In fact, the index depicts stress in an ordinal manner. So a reading of 2 vs. 1 will imply that conditions have tightened and not that the tightening is double in magnitude.

ICICI PROPRIETARY FINANCIAL CONDITIONS INDEX

Source: CEIC, RBI, Bloomberg, ICICI Bank Research

GVA axis is inverted

Bond FCI Money FCI Aggregate FCI (Rhs) Forex FCI Stock FCI

ICICI Bank FCI Lag 3 Core GVA (RHS)

Easi

ng fi

nanc

ial c

ondi

tions

COVID is breaking the relationship,but easing FCI to provide a floor tothe recession

Sep

12

Sep

13

Sep

14

Sep

15

Sep

16

Sep

17

Sep

18

Sep

19

Sep

20

1.20.80.40.0

-0.4-0.8-1.2-1.6

02468

10121416

(% YoY)Ea

sing

con

ditio

ns

Mar

18

Jun

18

Sep

18

Dec

18

Mar

19

Jun

19

Sep

19

Dec

19

Mar

20

Jun

20

Sep

20

2.0

1.0

0.0

-1.0

-2.0

0.30

0.10

-0.10

-0.30

-0.50

-0.70

WHAT IS iD80 INDEX?

iD80 Index is a breadth/width indicator of economic activity - captures the strength of the economy and directional change in momentum. It measures the proportion of economic high frequency indicators (combination of lead and co-inci-dent data) that have improved or showing positive momentum, compared to the previous month, and is used to assess the strength of the economy. "iD80 Index" is a general term that may be used in other areas of statistics or finance to assess how many components of a group are moving higher or lower.

HOW TO READ iD80 INDEX?

Similar to the commonly known PMI index, our iD80 Index reading above 50 indicates improving economic activity, while a reading below 50 indicates contracting activity. While a reading of 51 followed by a reading of 52 indicates, economic activity is growing at a faster pace, a reading of 52 followed by 51 will indicate economic activity is still growing but at a lower pace, compared to last month.

WHY IS THIS IMPORTANT?

A iD80 Index would thus be able to indicate directional change in economic activity. This becomes essential during crisis times, such as COVID, where tracking business resumption/economic improvement on a timely basis is critical. Since there are multiple indicators, that may all say different things, it is useful to have a compiled index which tells us whether the majority of the indicators point toward an improving economy or a deteriorating one.

The Diffusion Index by ICICI BankINDEX

70

50

30

10

75.968.9 68.4

55.0Impr

ovin

gCo

ntra

ctin

g

Jan

20

Feb

20

Mar

20

Apr

20

May

20

Jun

20

Jul 2

0

Aug

20

ICICI PROPRIETARY iD80 INDEX

We use a list of more than 80 high frequency indicators to capture the sequential movements in growth. We also divide the indicators under industry and services sub-categories and demand and investment sub-categories to understand the underlying movements as per the GVA and GDP sub-classifications, respectively.

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

ICICI PROPRIETARY DIFFUSION INDEX

80.0

60.0

40.0

20.0

0.0

76

5769

5968

60 5553

3337

Consuption Diffusion Index Investment Deffusion index

Impr

ovin

gCo

ntra

ctin

g

Consumption laggingbehind Investment

Jan

20

Feb

20

Mar

20

Apr

20

May

20

Jun

20

Jul 2

0

Aug

20

Services Diffusion IndexIndustry Diffusion Index

80.0

60.0

40.0

20.0

Impr

ovin

gCo

ntra

ctin

g

7177

72

53

71 6871

5455

3437

Industrial performancebetter than services

Jan

20

Feb

20

Mar

20

Apr

20

May

20

Jun

20

Jul 2

0

Aug

20

WHY DO WE NEED A UFI?

UFI is an indicator to assess resumption in activity on a weekly/ real-time basis. The disruptions created by COVID-19, lead to one of the most stringent lockdown across the world. This is now being followed by less stringent localized lockdown measures and gradual opening up of economy - businesses and trade.

Given the uncertainty about the possible vaccine for coronavirus, the risk of second wave of infection is still intact. In such times, gauging the movements of high frequency indicators (on an almost real time basis (weekly)) is of paramount importance, as it showcases how the economic recovery is pacing itself.

We calculate Ultra Frequency Index (UFI) using high frequency indicators to assess the state of the economy compared to the pre-COVID times. The indicator can be used as an early indicator of economic activity.

The Business Resumption Index by ICICI Bank

Source: CEIC, CMIE, POSOCO, Raildrishti, Vahan, GSTN, Google, Apple, ICICI Bank Research

ICICI PROPRIETARY UFI

Ultra Frequency Index measures the level of underlying indicator compared to the base which we have taken as average of January-February 2020 levels (pre-COVID times). Back testing our data has shown strong correlation between UFI and GVA growth – our correlation analysis finds that UFI and GVA growth are strongly correlated, leading us to believe that it is a robust indicator to track weekly movement in activity. We are also in the process of calculating State UFI which would help understand how different regions are performing compared to others and national averages.

We have also created a state wise heat map of movement in activity. It showcases business resumption and activity differentials across states. Our universe covers states that represent ~70% of the country by GVA. The state-wise activity levels are corroborating with the COVID infection spread, recovery etc.

120.0100.080.060.040.020.00.0

Base

100.090.4

44.454.3

76.283.0 85.3

Mar-20 Apr-20 May-20 Jun-20 Jul-20 Aug-20

GVA Const Index

(Inde

x, 1

00 =

Avg

jan-

Feb

20)

UFI vs GVA

The Financial Conditions Index by ICICI Bank

INDEXThe Diffusion Index by ICICI Bank

The Business Resumption Index by ICICI Bank

KNOW WHAT THE INDICES ARE TELLING US TODAY

READ NOW

READ NOW

READ NOW