Goldman Sachs launches new index

Financial services major Goldman Sachs has announced the introduction of Goldman Sachs India Financial Conditions Index (GS India-FCI), which is positioned as a comprehensive indicator to understand and forecast India's business cycle rather than just interest rates.

GS India-FCI incorporates interest rates, money, exchange rates and the stock market as important transmission channels of monetary policy, according to a note by Goldman Sachs.

The GS India-FCI said a slippage of 100 basis point in the FCI slows industrial activity by approximately 2 percentage points with a lag of roughly one quarter.

Weightage of various components of the FCI are interest rates (55 per cent), money supply (29 per cent), exchange rate (12.5 per cent) and stock market (3.5 per cent). According to the analysts, the GS India-FCI has certain inherent advantages.

According t them: "It provides a more comprehensive framework in which to understand the economic environment rather than narrow measures based solely on interest rates or money supply. It highlights the unique characteristics of the Indian economy. In particular, it takes into account that the exchange rate has gradually become a more important determinant of financial conditions, and that money supply is an independent transmission channel apart from interest rates. It takes into account the evolving dynamics in the relationship between the variables in the index through a 'co-integrating relation, and is fairly simple and transparent in construction."

Goldman said the GS India-FCI would act a useful tool to judge the monetary policy stance, based on clear assumptions and historical relationships. Investors can use the FCI and especially deviations in the paths of forecast variables to form a view on the path of policy, growth, and inflation.