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Estimating Financial Conditions Index for India

Author

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  • Jeevan Kumar Khundrakpam
  • Rajesh Kavediya
  • Jessica M. Anthony

Abstract

This article constructs financial condition indices (FCIs) for India and explores their predictive ability of business cycle. The estimated FCIs indicate substantial tightening in financial conditions in India since the global financial crisis barring a brief phase during 2010–11. Unlike in the literature, it shows the importance of standardising the financial variables by removing the influence of unit of measurement and not purging the influence of past economic activity as that improves the forecasting ability of FCI about business cycle. In predicting GDP growth, principal component analysis-based FCI outperforms vector autoregression-based FCI but both are better than OECD composite leading indicator, and indicate an upturn in business cycle in India in 2015–16. JEL Classification: E5, E17, E44

Suggested Citation

  • Jeevan Kumar Khundrakpam & Rajesh Kavediya & Jessica M. Anthony, 2017. "Estimating Financial Conditions Index for India," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 16(1), pages 61-89, April.
    • Handle: RePEc:sae:emffin:v:16:y:2017:i:1:p:61-89
    DOI: 10.1177/0972652716686273
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    References listed on IDEAS

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    Cited by:

    1. Snehal S Herwadkar, 2017. "Corporate leverage in EMEs: did the global financial crisis change the determinants?," BIS Working Papers 681, Bank for International Settlements.
    2. Acharya, Viral & Bhadury, Soumya & Surti, Jay, 2020. "Financial Vulnerability and Risks to Growth in Emerging Markets," CEPR Discussion Papers 14962, C.E.P.R. Discussion Papers.
    3. Harendra Behera & Saurabh Sharma, 2022. "Characterizing India’s Financial Cycle," Journal of Emerging Market Finance, Institute for Financial Management and Research, vol. 21(2), pages 152-183, June.

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    More about this item

    Keywords

    Financial conditions index; vector autoregression; principal component analysis;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy

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