Leading indicator for assessing the financial condition of Indian economy

Abstract

World Bank considers that “the true value of financial stability is best illustrated in its absence, in periods of financial instability. During these periods, banks are reluctant to finance profitable projects, asset prices deviate excessively from their intrinsic values, and payments may not arrive on time. Major financial and banking instability can lead to bank runs, hyperinflation, or a stock market crash. It can severely shake confidence in the financial and economic system”i . Literature review indicates that macro stability can be intact, however, financial instability can derail it leading to stress in the economy, which makes the need tracking stress in the financial system essential. While existing research exists for developed markets, there are white spaces when it comes to emerging markets like India, highlighting the need for a leading financial condition index for these economies. Through our study we aim to create a leading indicator in the form of a financial condition index which can synthesize information incorporated in different asset classes like fixed income, equities, foreign exchange, and commodities among others for India.