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 The Economic Indicators —

Finnacle Institute

1. UNDERSTANDING INFLATION.

2. UNDERSTANDING COMMONLY USED, TRACKED AND DISCUSSED

INDICATORS ON INDIVIDUAL LEVEL AND THEIR COMBINED IMPACT ON THE

MARKETS.

3. UNDERSTANDING MAJOR TERMINOLOGIES AROUND GDP, ITS

INTERPRETATION, CALCULATION AND IMPACT

4. UNDERSTANDING MAJOR INDICATORS PUBLISHED BY RBI ITS

INTERPRETATION, CALCULATION AND IMPACT

5. HIGH-FREQUENCY INDICATORS.

6. CONNECTING ALL DOTS.

 1. UNDERSTANDING INFLATION.

Definition: Inflation refers to the general increase in prices of goods and services over time.
It means that as inflation occurs, each unit of currency buys fewer goods and services. In
simple words, Inflation measures how much more expensive a set of goods and services has
become over a year.

Causes: Inflation can be caused by various factors such as increased demand for goods and
services, rising production costs, changes in government policies (like taxes or subsidies),
and even external factors like natural disasters or global economic trends.

11 Types of Inflation:

1. CPI: Consumer Price Index (CPI) Inflation: Measures the change in the price level of a
basket of consumer goods and services purchased by households.

2. WPI: Wholesale Price Index (WPI) Inflation: Measures the change in the price level of
goods traded in wholesale markets.

3. Demand-Pull Inflation: Caused by an increase in aggregate demand in the economy,

leading to a shortage in supply and higher prices.

4. Cost-Push Inflation: Caused by an increase in production costs, leading to higher prices

for goods and services.

5. Deflation: A sustained decrease in the general price level of goods and services, leading to
reduced spending, decreased business profits, and increased unemployment.

6. Disinflation: A slowing down of the inflation rate, where prices are still rising but at a
lower rate.

7. Stagflation: A period of spiking inflation plus slow economic growth and high
unemployment.

8. Creeping Inflation: A mild and gradual rise in the general price level, often considered
normal and managed by central banks.

9. Walking Inflation: Moderate inflation that is faster than creeping inflation but slower than
galloping inflation.

10. Galloping Inflation: High inflation rates, typically in excess of 20% per year.
11. Hyper-inflation: Extremely high inflation rates, often exceeding 50% per month.

There are major 2 types of Inflation:

1. CPI (Consumer Price Index): by MOSPI on 12th date of every month

a. The Consumer Price Index measures the overall change in consumer prices based
on a representative basket of goods and services over time.
b. On a monthly basis, CPI tracks prices of nearly 300 items to understand the rising
prices in the country.
c. The CPI is the most widely used measure of inflation, closely followed by
policymakers, financial markets, businesses, and consumers.

2. WPI (Wholesale Price Index):

a. The Wholesale Price Index (WPI) in India is a crucial economic indicator that
measures the average change in the prices of goods sold and traded in bulk at the
wholesale level.
b. The WPI is released monthly by the Office of the Economic Adviser in the
Ministry of Commerce and Industry, and it plays a significant role in tracking
inflation trends, influencing monetary policy, and formulating economic
strategies.
c. The index reflects price movements across various sectors, including agriculture,
manufacturing, and mining, and is essential for understanding supply and demand
dynamics within the economy'. It comprises 800+ items, allowing for an accurate
representation of economic conditions.
3. Impact of Inflation on Different Markets:
a. Bonds
i. The relationship between interest rates and inflation is inverse -
when inflation is rising, central banks typically respond by
increasing interest rates to control price increases.
ii. Conversely, when inflation is falling, central banks will lower
interest rates.
iii. A bond's duration is indicative of how much its price is likely to
change when interest rates move.
 iv. Therefore, a long-duration bond will see a higher increase in price
for a given decrease in interest rates.
v. Hence, investing in long-duration bonds when inflation is falling
and interest rates are expected to fall can be a good idea, as
investors will make capital gains on the bonds with an increase in
bond prices.
vi. Bonds command two types of premiums on top of benchmark
interest rates: a time premium and a risk premium.
vii. When inflation is rising and interest rates are rising to control
inflation, it makes sense to consider investing in short-duration
bonds.
viii. This is because raising of interest rate by central banks will first
transmit towards the shorter duration bonds.
ix. Thus, in a rate cut cycle, longer duration bonds are likely to be
favourable and in rate hike cycle, shorter duration bonds make
more sense.
b. Equity:
i. Higher Borrowing Cost:
1. High Inflation Influences central bank decisions on interest
rates. Higher inflation may prompt central banks to raise
interest rates to curb inflation, which can increase
borrowing costs for companies.
2. This can particularly impact highly leveraged firms and
those with variable-rate debt, affecting their profitability
and stock prices and valuation of all stocks
ii. Valuations:
1. A market-wide impact can be seen on the overall valuations
of equity securities.
2. The value of a security is the present value of all cashflows,
as Inflation rises and interest rates rise to control the
inflation, the valuation of equity securities falls as the
future expected cashflows are discounted at a higher
discount rate.
 3. Early-stage companies with high terminal values tend to
more sensitive to interest rates than mature companies.
iii. CPI vs WPI:
1. Increase in CPI and WPI can have different impacts on
different businesses, these impacts are explained below:
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c. Currency:

i. Interest Rate Differences:

1. Inflation influences interest rate differentials between countries.
2. Higher inflation in one country relative to others can prompt its
central bank to raise interest rates, making its currency more
attractive to investors seeking higher yields.
ii. Purchasing Power:
1. CPI affects a currency's purchasing power
2. Higher inflation reduces the currency's purchasing power
internationally, potentially leading to depreciation against other
currencies.
3. This can impact trade balances and international competitiveness.
iii. However, when it comes to the home currency's exchange rate with
a different country's currency, then the inflation for the two
countries needs to be studied: the absolute values don't have much
relevance here. (REER and NEER)

d. Commodities:

I. Raw Material Cost:

1. Inflation reflects changes in commodity prices, which can
influence production costs for companies.
2. Higher CPI indicating inflationary pressures may drive up
demand for commodities as a hedge against inflation, thereby
pushing commodity prices higher.
 3. Currency Impact: Commodities are priced in US dollars in
global markets. CPI-driven changes in currency values affect
the cost of commodities for importers and exporters,
influencing supply-demand dynamics and prices.

4. Impact of CPI vs WPI on Equity Markets:

a. Sector Performance: Different sectors react differently to inflation.

i. Consumer Discretionary Sector: Companies in this sector, such

as retailers, automakers, and entertainment firms, are sensitive to
changes in consumer spending power.
ii. Consumer Staples Sector: Companies selling essential consumer
goods like food, beverages, and household products are relatively
less affected by rising CPI.
b. Companies in sectors that can pass on increased costs to consumers, like
certain utilities or companies with strong pricing power, may fare better
during periods of rising inflation with increased stock prices.
c. Increasing WPI generally leads to higher costs for various sectors, affecting
profit margins, pricing power, and investment decisions.
d. Companies with strong pricing power may fare better, while those reliant
on low- cost inputs may struggle.
e. The overall impact varies by industry and individual company
circumstances.

5. Other Related Indicators to Inflation:

a. Gap Between CPI and WPI and its impact on BSE 500 Earnings:
a. Understanding the Relationship Between CPI, WPI, and BSE 500
Earnings.
b. We monitor the differences between the Consumer Price Index (CPI),
the Wholesale Price Index (WPI), and the earnings of BSE 500
companies.
c. This helps us determine whether these companies can transfer the
increased costs of inflation reflected in the WPI to their customers or if
they are absorbing these costs, which would affect their profits.
 d. If BSE 500 companies can pass on the costs, we expect the CPI to rise
along with the WPI, maintaining the current gap between them.
e. Conversely, if they are unable to pass on these costs, BSE 500 earnings
are likely to decline, resulting in a reduced gap between the CPI and
WPI.
b. CPI Projections and Yields
a. CPI Projections: The Consumer Price Index (CPI) cannot be
accurately projected because a significant portion is influenced by
food and fuel prices, which are unpredictable.
b. Correlation with Yields: One-year future yields do not strongly
correlate with one-year future CPI forecasts.
c. This is mainly because CPI projections often do not align with
actual CPI.

c. Then why Track it?

a. If market over reacts to inflation number but major contributor was

food which the RBI categorizes as temporary and doesn't act on it,
we can get the bonds at higher yields and lower prices due to panic
selling.
b. If there is a shift in trend it will last for longer creating opportunity.

6. Major Factors leading to Gap between CPI vs Core CPI

i. higher Demand (Demand lead to Rate Hike)

ii. Oil Prices (Supply push) (Probable Rate Hike)
iii. El Nino (Supply Push) (Probably no rate hike as it is temporary)
iv. Other Food Cost increased (Supply Push) (Probably no rate hike as it is
temporary)

7. Southern Oscillator Index:

a. The Southern Oscillation Index (SOI) is a critical climatic measure that reflects
the fluctuations in air pressure between the eastern and western tropical Pacific
Ocean, the SOI is significant as it serves as a predictor for monsoon rainfall
patterns. the SOI is essential for agricultural planning.
 El Nino refers to the periodic warming of sea surface temperatures in the central
and eastern Pacific Ocean, which typically leads to weaker monsoon rains in
India, resulting in droughts and adversely affecting agriculture, particularly
summer crops like rice, sugarcane, and cotton; historically, 10 out of 13 droughts
since 1950 occurred during El Nino years.
b. Conversely, La Nina is characterized by cooler ocean temperatures in the same
regions, often bringing increased rainfall and favourable conditions for the Indian
monsoon, enhancing crop yields and supporting water resources; however, it can
also lead to extreme weather events such as floods and landslides

El Nifio: SOI < -1.0

La Nina: SOI > +1.0

Neutral: SOI between -1.0 and +1.0

c. SOI is a leading indicator to measure of extreme weather conditions — given the

fact that India’s 40% of Inflation is dependent on Food prices it becomes an
important metric to track the SOI index for predicting upcoming uncertain
climatic conditions and their impact on expected impact on Food prices.

8. US Inflation Data:

a. Link between India and US's Inflation Rates

1. When the Consumer Price Index (CPI) in the United States is high, it
prompts the Federal Reserve to increase interest rates.
2. To prevent foreign institutional investors (Flls) from withdrawing their
investments, the Reserve Bank of India (RBI) may also need to raise interest
rates.
3. We primarily focus on US interest rates, as they significantly influence Fll
flows into India.
4. Out of the 11,728 Flls registered in India, approximately 3,548 (30%) are
based in the United States.
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2. Understanding Commonly Used, Tracked, and discussed

indicators on Individual level and their combined impact on
the markets.

1. PMI
a. The Purchasing Managers' Index (PMI) is a much-followed index globally
because of the fantastic "schedule" it follows
b. While many (if not most) other indicators are published with a lag, the PMI
comes out in the first few days of each month, and thus effectively acts as a
leading indicator.
c. The Purchasing Manager's Index (PMI) is an economic indicator derived
from the monthly survey Of the private sector companies,
d. PMI aims in providing information regarding the current and future
conditions of a business to the decision-makers, analysts and investors Of
the company.
e. The PMI is a weighted average of the following five indices: New Orders
(30%), Output (25%), Employment (20%), Suppliers' Delivery Times
(15%) and Stocks of Purchases (10%).

i. New Orders (30%); Measures the level of new orders received by

manufacturers.
ii. Production (25%); Reflects the current production levels in the
manufacturing sector.
iii. Employment (20%); Indicates changes in employment levels
within the manufacturing industry.
iv. Supplier Deliveies (15%): Assesses the speed of supplier
deliveries, which can indicate supply chain efficiency
v. Inventories (10%); Evaluates the levels of inventory held by
manufacturers.

f. Purchasing Manager's Index (PMI) = [PI*1] + [P2*0.5] + [P3*0]

P1 = Net positive outlook parameter companies

P2 = Net Neutral outlook parameter companies
P3 = Net Negative outlook parameter companies

PMI benchmarks = 50.

 g. The global PMI moves in sync with the global growth rate as well as global
trade growth, As we know, -60% of global growth comes from global trade
and therefore global GDP and trade are related and PMI release can lead both.

h. Secondly, the PMI can help us evaluate cross-country opportunities.

i. When the narrative in 2022 was that India is decoupling from the rest
of the world (specifically the West), the PMI offered the most
concrete proof for this claim.
ii. PMI data can single-handedly help us compare different economies,
given the uniformity in data collection methodology across countries.

i. To sum up, the PMI is an excellent indicator for quickly understanding the
change in a business cycle, but it's not sufficient on its own. It needs to be
married with other data points to create a holistic picture.

Apart from the PMI, which is a leading indicator, two other popular indicators are the Index
of Industrial Production (IIP) and data from eight core industries (often simply referred to as
'eight core data'). Both these kinds of data come with a certain amount of lag, to determine
concrete signals, one needs to 100k at the PMI, IIP, and eight core data together

2. IIP
a. The data relating to the Index Of Industrial Production (IIP) for a given
Month is released two months later.
b. Moreover, the IIP is an index, which means that there is a base year for
which its value has been set at 100, Currently, the base year is FY 12.
c. The objective of the IIP is to measure short-term changes over time in the
volume of output of industrial sector.
d. This index gives the growth rates of different industry groups of the
economy over a specified time period,
e. Individual items are included in the index basket (Le, the set of items that
construct the index) only if they provide some minimum contribution to the
national product.
f. The basket is so selected that the contribution to the national product of all
the items in the basket is, say, about 80 percent.
g. The industry groups that it measures are classified under the following:
Broad sectors like manufacturing (Further 23 more categories), mining, and
electricity.
h. Use-based sectors like capital goods, basic goods, intermediate goods,
infrastructure goods, consumer durables, and consumer non-durables.
i. The eight core industries of India represent about 40% of the weight of
items that are included in the IIP The Eight Core Sectors/industries are:
3. Eight Core:
a. The monthly Index of Eight Core Industries is a production volume index.
b. Eight Core Industries measures collective and individual performance of
i. Electricity
ii. steel
iii. Refinery products
iv. Crude oil
v. Coal
vi. Cement
vii. Natural gas
viii. Fertilizers

A. It is compiled and released by Office of the Economic Adviser (OEA),

Department of Industrial Policy & Promotion (DIPP), and Ministry of
Commerce & Industry.
B. The IIP, and manufacturing PMI should ideally move in the same direction to
create robust signals of industrial performance.
C. Thus, robust industrial sector data is typically indicative of a stronger
currency, higher yields, and better equity performance:
D. However, nothing remains ceteris paribus, and every macro-regime needs to
be studied with a fresh pair of eyes.

4. RBI OBICUS (Order book, Inventory, Capacity Utilization)

a. Order Book:
i. The RBI survey collects quantitative data on new orders
received during the reference quarter, along with the backlog of
orders at the beginning and pending orders at the end of the
quarter. This provides a comprehensive view of the order book
situation for manufacturers.
ii. Importance: The order book data serves as an indicator of
future production levels.
iii. An increase in new orders suggests that manufacturers may
ramp up production, which can lead to higher economic growth
and a decline in orders may indicate weakening demand.

b. Inventory:
i. The RBI survey gathers information on total inventories,
breaking them down into finished goods, and raw materials at
the end of the quarter.
ii. The inventory to sales ratio can be derived by comparing total
inventories against sales figures.
iii. The inventory to sales ratio is a critical measure of supply chain
efficiency
iv. A high ratio may indicate excess inventory relative to sales,
which could mean Inventory pile up and may lead to production
cutbacks.
 v. Conversely, a low ratio suggests strong sales relative to
inventory levels, indicating healthy demand and potentially
leading to increased production or a leading indicator for
Capacity expansion.

c. Capacity Utilization:
i. Capacity utilization is estimated from the responses of
manufacturing companies regarding their production levels
relative to their installed capacity.
ii. Interpretation: Capacity utilization provides insights into how
efficiently the manufacturing sector is operating.
iii. Higher utilization rates indicate strong demand and economic
growth, while lower rates may suggest underutilization and
potential economic slowdowns.

3. Understanding major terminologies around GDP, its

interpretation, calculation, and impact.
1. How The GDP Is Calculated?

a) There are main growth indicators in India: the Gross Domestic and the Gross
Value Added (GVA)
b) Technically, the GVA indicates an INR value for the amount of goods and
services that have been produced in a country, minus the cost Of all inputs and
raw materials that are directly associated with that production.
c) GVA can be defined as output produced after deducting the intermediate value
of consumption. This can also be mentioned
d) GDP = GVA + Taxes - Subsidies
GVA- Gross Domestic Product + Subsidies on products Taxes on products
e) To use corporate terminology, the GDP is akin to total sales or total revenue,
while the GVA is akin to net earnings.
The NSO provides both quarterly and annual estimates of the output of GVA
It provides sectoral classification data on eight broad categories that include
both goods produced and services provided in the economy.

i. Mining and Quarrying.

ii. Manufacturing.
iii. Agriculture, Forestry and Fishing,
 iv. Electricity, Gas, Water Supply and other utility Services.
v. Financial, Real Estate and Professional Services.
vi. Public Administration, Defence and other Services.
vii. Construction
viii. Trade, Hotels. Transport, Communication and Services related to
Broadcasting

f) But GDP is a key measure when it comes to making cross-country analysis

and comparing the incomes of different economies.
g) GVA is considered a better gauge of the economy.
h) The GVA is measured by value addition in specific economic activities and is
published along with an indication of key sectors.
i) These sectors are self-explanatory: the three most important ones are
agriculture, industry, and services, which are further divided into the following
sub-sectors.
j) GDP fails to gauge the real economic scenario because a sharp increase in the
output can be due to higher tax collections which could be on account of better
compliance or coverage, rather than the real output situation.

2. Calculation of GDP by expenditure method expenditure by different categories. The classic

GDP equation is:

3. GDP=C + I + G + (X -M)

i. C = (PFCE) = Private Final Consumption Expenditure

- Private consumption (C), which is what you, met and other private
consumers spend
ii. I = Investments in the economy (l) (roads, real estate, etc.),
iii. Government consumption (G), which is what the central and state
governments spend (e.g. public schemes)
iv. (X — M) Stands for Exports minus Imports
4. CFC - Consumption of Fixed Capital

a) Consumption of Fixed Capital (CFC) (Maintenance CAPEX) refers to the

depreciation of physical assets over time due to wear and tear, obsolescence, or
aging.
b) Also called CCA (Capital Consumption Allowance).

i. The capital consumption allowance (CCA) represents depreciation in the

overall economy and is expressed as a percentage of GDP.
ii. Removing the capital cost allowance from GDP gives you the net
domestic product (NDP) for that year.
iii. Capital goods, also known as capital stock, refer to items that help a
producer create consumer products and services, the CCA measures how
much the value of the stock of capital goods owned by a Country decline in
a given year by measuring economic depreciation, which includes not only
accounting depreciation but also other reasons for declines in value, such as
destruction or obsolescence.
iv. Here are some of the reasons that such a decline might happen
a. Ordinary wear and tear from regular use.
Capital goods break down before they are supposed to and
become unusable,
b. They can also be damaged or destroyed by fire or natural
disasters like flooding.
c. Capital goods often become technologically obsolete.

5. NDP (4-5) - Net Domestic Product

a) Net Domestic Product (NDP) is calculated by subtracting Consumption of

Fixed Capital (CFC) from Gross Domestic Product (GDP).
The formula is: NDP = GDP - CFC
b) NDP measures the total value of goods and services produced in an economy
after accounting for the depreciation of capital assets.
c) It provides a more accurate representation of an economy’s sustainable output
and its capacity to generate future income.
 d) NDP is important for understanding the long-term growth potential of an
economy. as it indicates the net increase in wealth and productive capacity
after maintaining and replacing depreciated capital.
e) An increase in NDP would indicate growing economic health, while a
decrease would indicate economic stagnation.

6. PFCF

a) Understanding Personal Final-Consumption Expenditures (PFCE)

b) Definition: Personal Final Consumption Expenditures (PFCE) is a key indicator
of consumer spending within an economy.
c) It measures the total amount spent by households on goods and services.
Components of PFCE
i. Durable Goods: These are items that last for an extended period. such
as Cars and appliances.
ii. Non-Durable Goods: These include items that are consumed quickly,
like food and clothing.
iii. Services; This category encompasses spending on services such as
healthcare, education. and entertainment.
d) Impact of Inflation
i. Rising inflation can negatively affect PFCE.
ii. As prices increase, consumers may reduce their spending or shift their
purchasing patterns. impacting overall economic growth
e) Importance of Analysing PFCE
i. Understanding the breakdown of PFCE is crucial for identifying
changing patterns in consumer spending over time.
ii. This analysis helps businesses and policymakers make informed
decisions based on consumer behaviour trends.

7. GFCF

a) GFCE= Gross output of administrative departments

b) = total current expenditure of the administrative departments for producing
government services.
 c) = compensation of employees (wages and salaries + pensions) + net purchase of
goods and services + consumption of fixed capital (CFC).

d) The main source of data for preparation of GFCE is the budget documents of
central and state governments and of local authorities.

i. According to the provisions of the constitution, before the close of

every financial year, the Government of India and each State
Government have to lay before the Parliament and the State
Legislatures respectively a statement of estimated receipts and
disbursements for every new financial year. This statement titled
*Annual Financial Statement" is the main budget document

8. GCF

a) Gross capital formation (GCF) refers to the aggregate of gross additions to fixed
assets (i.e., fixed capital formation), increase in stocks of inventories, hereinafter
referred to as change in stocks during a period of account and net acquisition of
valuables

9. GFCF

a) GFCF refers to the growth in the size of fixed capital in an economy. Fixed capital
refers to things such as buildings and machinery. for instance, which require
investment to be created. This includes Private and Govt spending on Capital Assets
formation

10. Valuables

a) Precious metals and stones that are not held for use as inputs into production
processes; Other valuables such as collections of Jewellery of significant value
fashioned out of precious stones and metals; and Antiques and other art objects such
as paintings and sculptures.

11. Primary income receivable from Rest Of World (ROW) (net)

a) Primary income refers to the income that residents of a country earn from their
participation in the production process or from owning financial assets and
 natural resources. When this income is received from non-residents (the rest of
the world), it is classified as primary income receivable from ROW The net figure
is obtained by subtracting primary income payable to non-residents from primary
income receivable. Components:
a. Investment Income: This includes dividends. interest, and profits earned
by residents on investments in foreign entities.
b. Compensation of Employees: Wages and salaries earned by residents
working abroad.
c. Rent: Income from leasing natural resources or property owned by
residents to non-residents,

12. GNI (Gross National Income) (GDP + Primary income receivable from ROW (net))

a) GNI calculates the total income earned by a nation's people and businesses,
including investment income, regardless Of where it was earned. It also covers
money received from abroad such as foreign investment and economic
development aid.

Residence, rather than citizenship, is the criterion for determining nationality in

GNI calculations, as long as the residents spend their income within the country.
GNI has come to be preferred to GDP by organizations such as the World Bank.
It also is used by the European Union to calculate the contributions of member
nations.

b) For some countries, the difference can be significant. GNI can be much
higher than GDP if a country receives a large amount of foreign aid or
foreign investment. This is the case with Bangladesh, which recorded a 2021
GNI of $438 billion compared to a GDP of $416 billion. But it can be much
lower if foreigners control a large proportion of a country's production, as is
the case with Ireland, a low-tax jurisdiction where the European and U.S.
subsidiaries of a number of multinational companies nominally reside.
Ireland recorded a 2021 GNI of just over $382 billion while their GDP for
the same period stood at $504 billion.
13. NNI (Net National Income) (GNI — CFC (i.e. Depreciation))

a. NNI is the aggregate value of the balances of net primary incomes summed
over all sector
b. NNI is equal to GNI net of depreciation.

14. Other current transfers (net) from ROW

a. Other current transfers refer to transactions between residents and non-

residents there is no exchange of goods or services for the transfer.
b. These transfers can be in cash or in kind and primarily include remittances,
gifts and grants.
c. Components
i. Personal Transfers: Money sent home by expatriates to their families.
ii. Government Transfers: Foreign aid or grants provided by one
country's government to another.
iii. Charitable Contributions: Donations from foreign entities or
individuals to domestic organizations.

15. GNDI (Gross National Disposable Income) (GNI + Other current transfers from ROW)

a) Gross National Disposable Income measures the income available to the nation for
final consumption and gross saving

16. NNDI (Net National Disposable Income) (GNDI - CFC)

a) Net National Disposable Income is the sum of the disposable incomes of all resident
institutional units.

17. Gross Saving in GDP data refers to the total amount of savings generated within an
economy, expressed as a percentage of Gross Domestic Product (GDP). It is a crucial
indicator of a country’s economic health and its capacity for investment

18. Net Saving

a) Removes CFC from Gross Savings

19. Gross Saving to GNDI

a) This ratio measures the proportion of gross savings in relation to Gross

National Disposable Income (GNDI). It indicates how much of the income
available to residents is being saved rather than spent.

20. GCF to GDP

a) This ratio measures Gross Capital Formation as a percentage of GDP,

reflecting the total investment in fixed assets and changes in inventories within
the economy. A higher GCF to GDP ratio indicates robust investment activity,
which is essential for economic growth and development.

21. GCF excluding Valuables to GDP

a) This ratio measures Gross Capital Formation excluding valuables (such as

gold and jewellery) as a percentage of GDP. It focuses on productive
investments rather than speculative assets.

22. PFCE to NNI

a) This ratio measures Private Final Consumption Expenditure (PFCE) as a

percentage of Net National Income (NNI). It reflects the consumption
Behaviour of households relative to the total income available to them.
b) For instance, the PFCE to NNI ratio was around 70.1%, suggesting a strong
consumer spending trend relative to the income generated in the economy.

23. Per capita Ratios:

a) Per- Capita GDP

i. The most basic interpretation of GDP per capita shows how much
economic production value can be attributed to each individual citizen.
Alternatively, GDP per capita translates to a measure of national
wealth because GDP market value per person also readily serves as a
prosperity measure
b) Per- capita GNI
i. While per capita gross domestic product is the indicator most used to
compare national income levels, two other measures are preferred by
many analysts. These are per capita Gross National Income (GNI) and
 Net National Income (NNI)v Whereas GDP refers to the income
generated by production activities on the economic territory of the
country, GNI measures the income generated by the residents of a
country. whether earned in the domestic territory or abroad. GNI is
defined as GDP plus receipts from abroad less payments to abroad of
wages and salaries and of property income plus net taxes and subsidies
receivable from abroad.
c) Per- capita NNI
i. While per capita gross domestic product is the indicator most
commonly used to compare national income levels. two other measures
are preferred by many analysts. These are per capita Gross National
Income (GNI) and Net National Income (NNI), Whereas GDP refers to
the income generated by production activities on the economic
territory of the country GNI measures the income generated by the
residents of a country, whether earned in the domestic territory or
abroad. NNI is the aggregate value of the balances of net primary
incomes summed over all sectors
ii. NNI is equal to GNI net of depreciation.

24. Common Terms in Business Cycles:

a) A recession:
i. Recession is a period of temporary economic decline. typically lasting
for at least six months, where there is a significant contraction in
economic activity
ii. During a recession, there are declines in GDP, employment, income,
and trade.
iii. It is generally characterized by reduced consumer spending, business
investment, and industrial production.
b) Depression:
i. A depression refers to an extended period of severe economic
contraction characterized by significant declines in economic activity,
such as GDP, employment, and investment.
ii. Depressions are marked by their duration, depth. and widespread
impact on various sectors or the economy.
 iii. They are more severe and prolonged than recessions and often involve
high unemployment rates, deflation, and financial instability.
c) Stagflation:
i. Stagflation is an economic phenomenon characterized by a
combination of stagnant economic growth, high unemployment, and
high inflation.
ii. It is a situation where an economy experiences both a rise in price
levels and a decline in output or economic activity.
iii. Stagflation is considered challenging to address because traditional
policy tools that target either inflation or unemployment may have
conflicting effects in this scenario.
iv. It can be caused by factors such as supply shocks, high energy prices,
or other structural imbalances in the economy.
v. The recovery period is When these indicators start to improve, either
through policy action or self-correcting mechanisms of the economy.

Impact of GDP on each asset class:

With all that said, let's now understand the effect GDP growth has on each asset class in
isolation.

1. Currency Markets:
i. As far as currency is concerned, high growth is good for currency
appreciation.
ii. A strong economy and higher interest rates are more likely to attract
foreign investments, which can increase the demand for the local
currency and cause it to appreciate against other currencies.
2. Bond Markets:
i. A relatively high GDP growth can also create demand-pull inflation.
ii. High, robust growth with high inflation leads to higher interest rates.
iii. This can lead to higher yields on bonds, as investors demand a higher
compensation for the increased risk of inflation.
iv. Generally, yields on the longer end go up when growth or growth
expectation is high, and come down when the economy is cooling off.
 v. For people investing in long-duration bonds, lower growth and
inflation is beneficial as a fall in yields leads to a price rise.
vi. Small wonder, then, that during times of crisis, debt markets are where
the most money is made!
3. Commodities Markets:
i. For base metals, higher growth is good news as it indicates higher
demand.
ii. This is relatively more dependent on economies that are major
consumers of commodities, such as China.
iii. China's GDP and base metal demand / prices move more or less
together.
iv. As commodities are priced in USD, the US's GDP is also significant.
v. For gold investors, however, a lower growth regime is better.
vi. In such a regime, it is physical, risk-free assets that tend to outperform:
recessions are generally associated with gold outperformance.
4. Equity Investors:
i. Lastly, for equity investors, higher growth is definitely a reason to
celebrate.
ii. It's associated with higher sales / revenue and profitability, brings in
more foreign flows, and generally creates a pro-growth market
atmosphere.
iii. However, very high growth, such that it brings in high inflation and
consequently high interest rates, can be considered as over-heating of
the economy.

4. Understanding major indicators published by

RBI its interpretation, calculation, and impact.

 Simply put, a monetary policy is a rule book created by a central bank to manage the
macroeconomic stability of a country's economy.
 The monetary policy of a country, along with its fiscal policy, is something most
investors tend to keep an eye on.
 Let's start with a brief history of India's monetary policy.
 Up until the 1980s, India followed a socialist model of development, with central
planning.
 The RBI played a supportive role in financing the government development projects
and providing credit to high-priority sectors.
 Its focus was to lend in a directed manner and control interest rates so that funds could
be channeled into the desired sectors, leading to economic growth.
 The nationalisation of 14 major banks in 1969 expanded the role of the public sector
in banking, and increased government control over credit allocation. However, in
1991 in response to a severe balance-of-payments crisis, India initiated economic
liberalisation and structural reforms. The RBI shifted its focus from directed lending
to a market-oriented monetary policy. The automatic monetisation of the government
deficit ended with ad-hoc treasury bills no longer being issued.
 Thus, the RBI's effective role changed from being a financer for the government to
containing inflation and promoting growth.
 The introduction of the LPG (Liberalisation, Privatisation, Globalisation) reforms led
to a gradual dismantling of interest rate controls, as well as the opening up of the
financial sector.
 In 1993, the RBI adopted a multiple-indicator approach, and began using several
macroeconomic variables to guide monetary policy decisions.
 The RBI started using policy instruments such as the repo rate, reverse repo rate, and
cash reserve ratio to manage liquidity and influence interest rates.
 India needed an autonomous central bank, a central bank that would not bend before
the government but would instead drive its own operations on the basis of market
forces, with an eye towards maintaining price stability and growth.
 In 2013, the RBI formally adopted an inflation-targeting framework.
 The objective of the framework is to maintain price stability while supporting
economic growth-The Monetary Policy Committee (MPC), constituted in 2016,
became responsible for setting the policy interest rates.
 The RBI implemented a flexible inflation-targeting regime, with the goal of keeping
inflation within a specified range, namely 2-6% the midpoint of which is 4%.
  The policy interest rates, such as the repo rate, became the primary tools for
influencing inflation and managing monetary conditions.
 On the growth front, the RBI measures a "potential growth": the growth rate that India
can, in principle, sustain given its inputs of labour, capital, and technology, and tries
to drive the actual growth closer to the potential growth
 For example, if the potential growth rate is 6% and the current growth rate is 2%, the
RBI is likely to ease interest rates to support growth.
 There are several instruments available to the MPC to help it achieve its objectives of
inflation-growth-currency stability, which we will see soon.

RESERVES:

Total Reserves:

 The level of total reserves is closely monitored by policymakers, investors and rating
agencies as an indicator of the country's economic health and ability to withstand
external shocks
 Significant changes in total reserves can also influence the RBI's monetary policy
decisions, as the central bank aims to maintain adequate reserves while managing
inflation and supporting economic growth.

Foreign Currency Assets (FCA):

 The composition of FCA, which is denominated in major currencies like the US

dollar, euro, and yen, can be affected by exchange rate fluctuations, which may lead
to valuation changes in the reserves.
 As of 16 Aug, 2024 — FCA comprise of 88% of the Total Reserves.

Special Drawing Rights:

 Special drawing rights, which are an international reserve asset created by the IMF,
make up a small portion of India's foreign exchange reserves.
 The value of SDR holdings is determined by a basket of major currencies, including
the US dollar, euro, Chinese renminbi, Japanese yen, and British pound, and may
fluctuate based on exchange rate movements.
  The RBI's SDR holdings are primarily used for transactions with the IMF and have a
minimal direct impact on domestic financial markets-
 Quota Contribution = National Currency + Basket of Currency
o Basket of Currency:
 USD -USA
 Euro - EU
 JPY - Japan
 Pound - UK
 Yuan — China
 Export Criteria — Top 5 Country
 Currency Acceptability at global level

Reserve Tranche Position in IMF

 The reserve tranche position in the IMF represents India's liquid claims on the IMF
and is a part of the country's foreign exchange reserves.
 25% of Quota Contribution — Unconditional Borrowing Resort of Borrowing)
Remaining 75% is Credit Tranche — Provided as loan.

https://www.rbi.org.in/commonman/English/Scripts/PressReleases.aspx?Id=3352
( point 16 (i))

 However. before we dive into that. let's understand a key term related to monetary
policy: the liquidity adjustment facility (LAF).
 The LAF allows banks to borrow funds from the central bank on an overnight basis,
using government securities as collateral.
 The LAF consists of two components: MSF and the SDF.
 The repo rate is the rate at which banks can borrow funds from the central bank, while
the reverse repo rate is the rate at which banks can park their excess funds with the
central bank.
 Key Monetary Policy Tools And Techniques
 Let's now move on to the definitions of monetary policy instruments:
 Repo Rate:
 o The interest rate at which the Reserve Bank provides liquidity under the
liquidity adjustment facility (LAF) to all LAF participants against collateral in
the form of government issued and other approved securities.
 Reverse Repo Rate:
o The interest rate at which the Reserve Bank absorbs liquidity from banks
against the collateral of eligible government securities under the LAF.
 Cash Reserve Ratio (CRR):
o The average dally balance that a bank is required to maintain With the Reserve
Bank as a percentage of its net demand and time liabilities (NDTL), The
NDTL is, simply put, the sum of demand deposits (money which is payable
when demanded, such as savings accounts) and time deposits (money which is
usually payable on maturity, such as fixed deposits), This ratio is close to
4.5%.
 Statutory Liquidity Ratio (SLR):
o Every bank shall maintain certain percent of its NDTL in risk-free, easy to
liquidate internments such as in the form of unencumbered government
securities, cash, and gold. SLR is the ratio of such securities to total assets.
This ratio is close to 4.5%.
 Standing Deposit Facility (SDF) Rate:
o This is the rate at which the Reserve Bank accepts uncollateralised deposits,
on an overnight basis, from all LAF participants.
o In addition to its role in liquidity management, the SDF is also a financial
stability tool.
o The SDF rate is set at 25 basis points below the policy repo rate.
o With the introduction of the SDF in April 2022, the SDF rate replaced the
fixed reverse repo rate as the floor of the LAF corridor.
o (*The 'LAF corridor' is a percentage range with the policy repo rate (say
6.5%) at the centre, flanked on either side by the MSF (6.75%) and the SDF
(say 6.25%)- Thus, the policy corridor has a width of 50 basis points (6.75% -
6.25%).)
 MO, also known as narrow money or the monetary base, refers to the most liquid
form of money in an economy.
o It includes physical currency (banknotes and coins) in circulation that’s issued
by the central bank and commercial banks' deposits with the central bank.
o MO represents the foundation of the money supply, and is directly controlled
by the central bank.
 M1 includes a broader range of money than MO.
o It encompasses MO and adds demand deposits, which are funds held in
checking accounts that are accessible for immediate withdrawal by depositors.
o It represents the most immediately accessible and widely used forms of money
for day to-day transactions.
 M2 is an even broader measure of the money supply than M1.
o It includes all the components of MI and further adds certain types of near-
money or quasi-money.
o Quasi-money refers to financial assets that are highly liquid and can be easily
converted into cash.
o Examples of quasi-money include savings deposits, money market mutual
funds, and other relatively liquid financial instruments.
 Finally, M3 is the broadest measure of the money supply
o It encompasses M2 and then adds to its long-term time deposits, institutional
money market funds, and other large and less liquid financial assets.
o M3 captures a very broad range of financial instruments, and is used to
monitor the overall availability of money in an economy
 M3 is used to calculate the Velocity and Money Multiplier
o The velocity of money, which is the nominal GDP (INR 234 trillion for FY22)
divided by M3 (INR 204 trillion for FY22).
o The velocity of money estimates the pace of movement of the money in an
economy — in other words, the number of times the average rupee changes
hands over a single year, and is also an example of efficiency.
o A high velocity of money indicates a bustling economy with strong economic
activity, while a low velocity indicates a general reluctance to spend money-
o FY22, India's M3 stood at INR 204 trillion. As these figures indicate, M3 is
roughly 5x of MO, so the money multiplier is around 5.
MPC Meetings And Statements

 Now that we're broadly aware of the tools and methods at the disposal of the RBI, let's
understand what monetary policy is all about.
 The MPC typically once every two months and takes a holistic overview of the
economy. based on their own models, the markets, and professional forecasters.
 It then decides the Ideal interest rate for the economy in the form of cut/hold/pause.
 It also takes a decision regarding its stance Historically, there have been 3 stances.
hawkish/neutral/dovish.
 Put simply, the stance reflects the future guidance: a neutral stance indicates a pause
on interest rate changes, a hawkish stance creates expectations of a rate increase (and
a tightening of liquidity), and a dovish stance creates expectations of falling interest
rates (and more liquidity).

The RBI has several different streams of income and expenditures.

 Interest income:
o The RBI earns interest income from its investments in government securities,
treasury bills, and other approved securities.
o Those investments generate returns in the form of interest payments, which
contribute to the RBI's income.
 Monetary policy operations:
o The RBI conducts monetary policy operations, such as repo and reverse repo
auctions, through which it lends money to or borrows money from banks.
o The interest earned or paid on these operations adds to the RBI's income or
expenses.
o When banks borrow from the RBI, the central bank makes money When banks
park money with the RBI, the central bank pays money.
 Foreign exchange operations:
o The RBI manages India's foreign exchange reserves and conducts foreign
exchange operations to stabilise the value of the Indian rupee.
 o These operations involve buying and selling foreign currencies, and any gains
or losses from these transactions contribute to the RBI's income and expenses.
 Banking and financial services:
o The RBI provides various banking and financial services to commercial banks,
the government, and other entities.
o These services include maintaining banking accounts, managing the
government's debt, and facilitating payments and settlements
o The fees and charges levied for these services generate revenue for the RBI.
 Surplus from balance sheet:
o The RBI's balance sheet includes assets and liabilities, and any surplus
generated from its operations contributes to its income.
o This surplus is calculated by deducting the expenses incurred by the RBI from
its total income.

Impact on Asset Classes due to Monetary Pot9:

Commodity Markets:

 In the context of commodities: an easier monetary policy, akin to Quantitative Easing

in the US (which is when the Federal Reserve buys assets and adds liquidity to the
markets), weakens the dollar.
 The easing of the dollar index can be good for commodities, especially base metals.
 Essentially, it is assumed that an easier monetary policy leads to higher growth, which
leads to higher demand for commodities and therefore higher prices
 Also, since globally commodities are priced in dollars, a weaker dollar means higher
nominal prices for commodities

Currency Markets:

 As far as currency is concerned, the easier the monetary policy, the more currency is
expected to depreciate.
 Why? Well, in India's case, for a given dollar amount (assuming no fresh net inflow),
there are more rupees entering the economy, which moves the exchange rate upwards,
which means that the rupee depreciates.
 Additionally, money flows better in an economy that has higher interest rates, as
investors chase yields.
  A tighter monetary policy means higher rates, which has a positive impact on
currency.
 And this is why there exists something called the 'central bank's trilemma':
lower rates are good for growth, bad for currency, and also bad for inflation, so
policymakers always need to consider how much growth can possibly be safely
sacrificed. It's a fine balance.

Bond Markets:

 For debt market investors, an easier monetary policy is nothing short of bliss,
especially when it comes to long-duration debt.
 Lower the yields, higher the capital gains on bonds.
 Every action of RBI which has a flavour of expansion- liquidity injection, OMO,
outright rate cut etc, benefits debt markets.

Equity Markets:

 Easier monetary policy is also a blessing for equity markets, in general Lower interest
rates typically lead to a lower discount rate used in Discounted Cash Flow (DCF)
valuations.
 A lower discount rate increases the present value of future cash flows, which can
positively impact the PV of future earnings today.
 This is because the lower discount rate reflects a lower cost of capital and implies that
future cash flows are worth more in today’s rupees.
 Lower interest rates can reduce the cost of debt for companies. This can lead to
lower interest expenses and potentially higher profitability for these companies.
Higher profitability can positively affect the valuations.
 5. High-Frequency Indicators:
Retail Payment and Digital Payment

a. Retail payments are typically all payments between consumers, businesses, and public
authorities.
b. Sourced from National Payments Corporation of India (NPCI), it is updated monthly.
It is typically a sum total of Debit Transfers and direct debit, Card Payments, Prepaid
Payment Instruments and Paper based Instruments.
c. The growth and stability of retail payments indicate the overall purchasing power and
confidence of consumers.
d. A higher growth in retail payments is also an indication that use of digital/formal
ways of payments are increasing.
e. Tracking of payments via UPI etc is possible with this data set.

Rural wage growth:

a. For simplicity, we take the average wage rates of men in rural areas
b. In reality, data is available across occupations- agriculture, construction etc.
c. This data is sourced from the Labour Bureau, Ministry of Labour and Employment
and is updated every month A significant rise in Rural wage is indicative of Rural
recovery.

Passenger car sales:

a. This indicator tracks the domestic sales of passenger cars and is sourced from Society
of Indian Automobile Manufacturers (SIAM).
b. It is updated every month.
c. Rising car sales can indicate a strong consumer demand, increased purchasing power,
and is usually a phenomenon in good economic cycles.
d. It can also be used as an Consumer Sentiment Indicator at overall economic
e. SOURCE: FADA.in (Journal and Press Release), SIAM, RBI Bulletin

POL (Petroleum, Oil, and Lubricants) consumption:

 a. It represents the sales of Petroleum products and includes various products including
Diesel, LPG, Motor Spirit, Petroleum coke, lubricating oil, with Diesel making almost
half of it.
b. The data is sourced from the Ministry of Petroleum and Natural Gas, released in the
document PPAC, and is updated every month.
c. This indicator represents the volume of sales by oil companies in the domestic market
and therefore is not affected by prices.
d. POL consumption serves as a proxy for energy demand in an economy
e. Higher POL consumption suggests increased economic activity and industrial
production as energy is a crucial input in various sectors such as manufacturing,
transportation, and agriculture.
f. Monitoring POL consumption provides insights into the overall health of the
economy and can help in assessing the pace of economic growth.
g. Source: Petroleum Planning & Analysis Cell

GST Collection

a. GST is a consumption-based tax levied on the supply of goods and services, replacing
multiple indirect taxes.
b. Higher collections indicate increased economic activity, consumption, and tax
compliance.
c. GST data often makes it to newspaper headlines to indicate economic activity. The
data is sourced from the GST council.

E-way bills:

a. E-way bills are electronic documents required for the movement of goods in India
under the Goods and Services Tax (GST) regime.
b. They serve as a tracking mechanism for the transportation of goods.
c. E-way bills can be used to gauge the movement of goods, level of trade and economic
activity.
d. An increase in e-way bill generation indicates a higher volume of goods being
transported.
e. E-way bills are directly linked to the GST system, which is a major source of tax
revenue for the government.
 f. Monitoring e-way bill generation can help assess the overall tax collection trends,
providing insights into government revenue and fiscal health.
g. The data is obtained from the GST Network.

Industry Or Manufacturing Indicators

 While we have discussed the most important indicators (PMI, IIP and Eight Core
data), lets look at all the other data that is available to us for deeper insights.

Credit to industry:

a. It measures the amount of credit extended to the industrial sector by bank.

b. It reflects the overall lending activity directed towards industrial enterprises, including
manufacturing, mining, construction, and other related sectors across micro, small,
medium and large enterprise.
c. High credit is a function of high credit demand, possibly because expansion is
underway or banks are lending at favourable terms

Cement/coal/steel production:

a. These numbers are available within the Eight Core data release and are updated
monthly.
b. They have close linkages with industrial performance and are significant in
infrastructure development and construction activities.
c. When an economy is expanding, there is increased demand for infrastructure
development, housing construction, and commercial buildings, all of which require
these inputs.
d. Increased focus government on capex such as road infrastructure also leads to these
numbers doing well.

Order book, Inventory, Capacity utilisation:

a. This data is captured by Order Books, Inventories and Capacity Utilisation Survey
(OBlCUS) which is conducted by Reserve Bank of India.
b. This survey throws light on all 3 parameters- Order books, raw material inventory and
capacity utilisation of which capacity utilisation levels is the most tracked indicator.
 c. A capacity utilisation number above approximately 75% says that now firms Will
invest into additional capacity expansion.

Service Sector Indicators

Credit to services:

a. Part of the credit data released monthly, it measures the amount of credit extended to
the services sector of an economy.

Services trade surplus:

a. India is now becoming a powerhouse for services exports and is expanding Its horizon
beyond IT services exports alone.
b. Legal consulting, exports etc are picking up.
c. This indicator is essential to understand exports of services in India.

Services PMI:

a. In parallel to Manufacturing PMI discussed in an earlier chapter, services PMI

measures the health of the services sector.
b. It is a lead indicator and is available across countries for comparison
c. A reading above 50 shows expansion and a reading below 50 shows contraction in
activity

Airport passenger traffic:

a. Rising passenger numbers suggest that individuals have the financial capacity and
confidence to engage in air travel, signalling a positive economic environment.
b. The data for the same is provided by the Airport Authority of India, Ministry of Civil
Aviation and is updated quarterly.
c. It is the measure of mobility of the economy and consumer preferences.

Railway freight traffic:

 a. It refers to the transportation of goods by railways for which the railway company
earns revenue.
b. Commodities transported by railways majorly include coal, followed by iron ore,
cement, foodgrain, etc.

External Sector Indicators

1. Indian rupee (INR/USD)

a. It reflects the amount of Indian Rupee required to purchase one US dollar and is
Widely tracked on a daffy basis.
b. India has been following a managed floating exchange rate regime.
c. This means that the exchange rate is determined by market forces, but the
central bank (RBI) can intervene in the market to buy or sell foreign currency in
order to smooth out fluctuations in the exchange rate.
2. FX reserves USD Bn:
a. It reflects the amount of foreign currency held by a country's central bank. It
represents the stockpile of foreign currencies, primarily in US dollars (USD),
that a country can use to stabilise its domestic currency, intervene in foreign
exchange markets, and meet international payment obligations.
b. Monitoring the level and trend of a country’s FX reserves IS important for
policymakers, economists, and investors to assess a nation's external financial
position and economic stability.
c. Sudden declines or insufficient reserves can indicate vulnerabilities in a
country's economy, such as potential currency crises, liquidity shortages, or
difficulties in meeting international obligations.
3. Trade balance:
a. It measures the difference between a country's exports and imports of goods and
services over a specified period and is available to track every month.
b. It provides valuable insights into a country's international trade performance and
the flow of goods and services across its borders,
 c. A positive trade balance, often referred to as a trade surplus, occurs when a
country's exports exceed its imports.
d. Conversely, a negative trade balance, known as a trade deficit, arises when a
country's imports surpass its exports.
4. Import Cover
a. Import Cover = (Total Reserves help by CB)/ Total Imports
b. If import cover is 10,
i. That means using our Forex Reserves the country will be capable of paying
for Its imports for the next 10 months without relying on its exports.

Monetary Indicators:

1. M3 (broad money):
a. M3 represents the broadest measure of money supply within the economy
b. M3 provides a comprehensive view of the money supply.
c. An increase in M3 may indicate strong demand for credit and investment.
co-existing with economic expansion.
d. Conversely, a decline in M3 growth may indicate a slowdown in lending and
economic activity.
2. M3/M0:
a. Also known as money multiplier, the ratio of M3 to MO is a measure of how
much money multiplies in an economy.
b. It provides insights into the extent to which the broader money supply expands
beyond the base money provided by the central bank.
c. A higher M3/M0 ratio indicates a higher level of money creation and
expansion by the banking system through lending and deposit creation.
d. The M3/M0 ratio is often used to assess the level of financial intermediation
and credit creation in an economy.
3. G-sec 10-year yield:
a. This indicator reflects the Yield on 10 Year Residual Maturity of Government
of India dated Securities in Secondary Market.
b. We note here that Government securities are almost risk-free assets. It serves
as a benchmark for borrowing costs, reflecting changes in interest rates for
mortgages, corporate loans, and consumer loans.
4. 5-year AAA yield:
 a. These are the weighted average of yields of 5-year AAA rates companies.
b. 5-years tends to be one of the liquid papers in corporate bond markets and
therefore this yield is a good gauge of activity in the corporate bond market
c. 5-Year AAA Yield reflects the prevailing market sentiment and risk
perception- When investors have confidence in the economy and expect low
default risk, the yield
d. tends to be lower (AAA bond yield -G-sec Yield=) Gap — Rising or falling.
e. Conversely, during periods of economic uncertainty or high-risk perception,
the yield tends to be higher.
f. The difference between corporate yield and G-sec yield is the “risk premium”,
i.e, higher yield is commanded because companies can default but
Government debt is risk free.
5. 5-year AA yield:
a. It is the yield in the secondary market of 5-Year residual maturity AA rated
corporate bonds.
b. As the credit rating increases, the risk of default decreases, leading to lower
yields because investors are willing to accept lower returns for safer
investments.
c. Therefore, usually AAA yields are lower than AA Yields.
6. Credit-to-deposit ratio:
a. It measures the proportion of a country's bank deposits that are being used to
extend credit or loans.
b. It is calculated by dividing the total amount of credit outstanding in the
economy by the total amount of deposits held by banks.
c. Also, provides an understanding of the lending activity and liquidity position
of banks within an economy.
d. A high credit-to-deposit ratio implies that a larger proportion of deposits is
being utilised for lending purposes.
e. This means that there is both demand and supply of credit in the economy.

Flows In Markets And Economy

This is a set of data that can be tracked to understand the foreign money coming into our
markets/economy.
1. FII net debt:
a. This measures investment in Debt by Foreign Institutional Investor is sourced
from the CDSL and is updated daily.
b. When FII invest in debt instruments such as government bonds or corporate
bonds, it brings in foreign capital, which can impact the exchange rate of the
domestic currency and also contributes to market liquidity
2. FII (Foreign Institutional Investors) net equity:
a. FII investment in equity represents foreign capital inflows into the country's
financial markets.
b. The data is sourced from the CDSL and is updated daily FII investment in
equity is often considered an indicator of a country's economic potential
c. Robust FII inflows suggest that foreign investors perceive the country as an
attractive investment
3. Net FDI (Foreign Direct Equity) flows:
a. Unlike Ell investment flows, FDIs are not about owning financial instruments
of a company but about owning a significant share of the company via
vehicles such as joint ventures and strategic alliances
b. Net FDI Flows are calculated by subtracting Foreign Direct Investment by
India from Foreign Direct Investment to India, across various sectors.
c. The data for Net FDI is sourced from RBI and is updated monthly.
d. Net FDI is often seen as a driver of economic growth and development as it
brings in capital, technology, managerial expertise, and access to global
markets.
e. Monitoring net FDI trends allows policymakers to identify sectors that are
attracting significant Investment and those that require policy support.
f. Foreign investment Facilitation Portal. INDIA (fifp.gov.in)
4. Private transfers:
a. Net inflows to and from abroad in the form of remittances, gifts, inheritance
and support payments is generally referred to as private transfers-
b. For instance, if my cousin working in the US sends money to his family in
India, it will be accounted for as a private transfer. Inflows of private transfers,
such as remittances, are recorded as current account receipts and are a source
of foreign exchange earnings for the receiving country.
c. The data is sourced from RBI and is updated every quarter.
Equity Valuation Indicators

1. Market-cap-to-GDP:
a. The market capitalization-to-GDP ratio, also known as the Buffett Indicator, is
a metric used to assess the overall valuation of a country's stock market
relative to its gross domestic product (GDP).
b. The idea is that if the market cap is much higher than GDP then it is
unsustainable and is likely to correct.
c. Lower ratio implies markets can move up.
d. Advanced economies sustainably have higher ratios because listed space
depicts a bigger portion of the economy.
2. Price-to-earnings:
a. It is calculated by dividing the market price per share of a stock by its earnings
per share (EPS).
b. The P/E ratio provides insight into how much investors are willing to pay for
each dollar of a company's earnings.
c. A high PIE ratio suggests that investors have high expectations for the
company’s future growth and are willing to pay a premium for its stock.
d. Conversely, a low PIE ratio may indicate that the stock is undervalued or that
investors have lower expectations for the company's future performance.
e. It's important to note that PIE ratios vary across industries and sectors, so its
typically more meaningful to compare the PIE ratio of a company with its
peers in the same industry
3. Price-to-book:
a. The price-to-book (P/B) ratio is a financial metric used to assess the valuation
of a companv’s stock relative to its book value. It is calculated by dividing the
market price per share of a stock by its book value per share.
b. The book value of a company is determined by subtracting its total liabilities
from its total assets, and then dividing result by the number of outstanding
shares.
c. The book value represents the net worth of a company on its balance sheet.
4. The Dollar Index (DXY)
a. The Dollar Index (DXY) is an important Indicator not Just for commodity
prices, but also for various other markets.
 b. It's a measure of the value of the US dollar relative to a basket of other major
currencies.
c. It provides a weighted average of the exchange rates between the US dollar
and a group of six currencies: the euro/EUR), Japanese yen (JPY), British
pound (GBP), Canadian dollar (CAD), Swedish krona (SEK), and Swiss franc
(CHF).
d. In the last decade, the DXY has moved roughly between 70 and 110. with a
reading of 70 meaning a weak dollar and a reading of 110 meaning a very
strong dollar.
e. What makes the dollar strong or weak? Simply put, when the US economy is
perceived to be stronger than the economies of other countries, the dollar
index is strong, and vice versa
f. Commodity prices and the dollar index exhibit an inverse correlation: the
stronger the dollar. the lower the commodity prices. and vice versa.
g. Most commodities are traded and priced in US dollars on global commodity
exchanges.
h. As a result, when the US dollar gets stronger, it effectively reduces the
purchasing power of buyers holding other currencies.
i. This tends to decrease the demand for commodities and puts downward
pressure on their prices.
j. Conversely, when the US dollar weakens, it becomes relatively cheaper for
foreign buyers to purchase commodities priced in dollars.
k. This increased affordability can stimulate demand for commodities, leading to
higher prices.
l. This inverse relationship between commodity prices and the dollar index is an
important consideration when it comes to gauging and understanding
commodity prices.
5. Copper to Gold Ratio
a. It's true that precious metals are also inversely correlated With the dollar
index.
b. It's also true that the demand-supply and commodity curves influence precious
metal price.
c. However, they tend to do even better when economic growth is middling or
slowing, and when market players want to reduce their risks.
 d. This is because they're considered to be low-risk stores of value.
e. Therefore, the ratio of copper to gold prices can be used to gauge the overall
risk
f. A higher ratio (i.e. copper prices are on an uptrend) implies a risk-on
sentiment, while a lower ratio (i.e. precious metal prices are on an uptrend)
implies a risk-off.
6. REER:
a. The real effective exchange rate (REER) compares a nation's currency value
against the weighted average of the currencies of its major trading partners.
b. It is an indicator of the international competitiveness of a nation in comparison
With its trade partners,
c. The data for the same is sourced from RBI and is updated monthly An
increase in the REER implies that exports become more expensive and
imports become cheaper, therefore, an increase indicates a loss in trade
competitiveness.
d. The REER is adjusted for the effects of inflation for every currency in the
basket, enabling it to be a measure of what can actually be purchased by a
currency.
e. The REER is used to understand how well a currency is doing With respect to
other currencies and also With respect to itself in the past.
f. An REER above 100 shows a currency's strength and overvaluation, and one
below 100 indicates a weak currency.
g. A very high REER points at possible depreciation and very low REER points
at possible appreciation

6. Balance of Payment
Trade Balance Introduction:

1. India's trade involves two broad categories

a. Goods (cars, wines, wheat, and the list goes on) and
b. services (such as IT and telecom consultancy).
2. Exports are the goods / services we send out to the rest of the world, typically in
exchange for dollars.
 3. Imports are the goods / services we buy from the rest of the world, and which we pay
for in dollars.
4. The difference between the monetary value of imports and exports is called the trade
balance.
5. When the value of imports is higher than that of exports, we get what's called a trade
deficit (this is usually the case for India's foreign trade in goods).
6. When the opposite is true, we get what's called a trade surplus (this is the case for
India's foreign trade in services).
7. The trade balance, by virtue of its effect on the country’s balance of payments or BOP
(i.e. a Metric summarising India's economic transactions With foreign countries), has
a direct impact on the currency.
8. A trade surplus makes a case for domestic currency appreciation because in that
situation, for a constant amount of domestic currency, the amount of dollars in the
economy increases.
9. Conversely, a trade deficit implies that dollars exit the economy (we pay more than
we earn) and thus make a case against the domestic currency.

Two other important measures of the external situation of the country. the current account
balance (CAB) and the balance of payments (BOP).

Current Account Balance (CAB)

1. The CAB can be broken up into four components:

i. Trade in goods:
a. The import-export goods such as machinery, Jewellery, oil, cars
etc. India usually has a deficit here, that is, imports are higher than
exports (so dollars go out).
ii. Trade in services:
a. The import-export of services such as IT, business processing etc.
b. India usually has a surplus here, that is, the dollar value of the
services provided is higher than that of the services received (so
dollars come in).
iii. Primary income:
i. This represents the net inflow or outflow of the income earned by
the residents of country due to their participation in economic
 activity abroad, such as the wages earned by expatriate workers or
the profits earned by multinational corporations.
ii. For India, this number is usually negative, that is, more income is
earned by foreigners in India than by Indians abroad (so dollars go
out).
iv. Secondary income:
i. This represents the net inflow or outflow of funds transferred between
residents and non-residents, such as remittances sent by foreign
workers to their home countries, or foreign aid given by one country to
another.
ii. For India, this number is usually positive — the remittances received
by resident Indians are greater in total value than the ones that get sent
out(so dollars come in).
2. Capital account:
i. The capital account primarily includes capital transfers, which refer to
transfers of financial assets and liabilities without being accompanied
by any corresponding economic transactions.
ii. Examples of such transfers are debts that are forgiven, inherited
estates, and donations.
iii. The capital account also includes transactions related to the
acquisition and disposal of non-produced, non-financial assets such as
patents, copyrights, and trademarks.
iv. In the Indian context, this usually works out to be a relatively small
negative number.
3. Financial account: