For the first time, a domestic bank will start giving a forward-looking economic index. The State Bank of India, the country’s largest lender, will use its loan book to give indicators on the domestic manufacturing activity from the New Year.
The SBI Composite Index will have both monthly and yearly indices. The short-term report, to be released in the first week of every month, will forecast the state of the economy two months down the line. The annual index will make year-on-year forward predictions.
Similar economic forecasts published by British lender HSBC, with global business survey compiler Markit, are the HSBC India Services Purchasing Managers’ Index (PMI), HSBC India Manufacturing PMI and the Markit India Business Outlook.
Soumya Kanti Ghosh, Chief Economic Advisor at SBI’s economic research department, said SBI’s figures are not intended to rival HSBC’s numbers.
However, during the eight years of back-testing (2007-2014), the SBI index accurately predicted economic direction 72 per cent of the time while the PMI had a 50 per cent strike rate.
Arundhati Bhattacharya, Chairperson and Managing Director, SBI, said the index will take into account the credit demand and other indicators of economic activity like consumer spending, mining activity, interest rates, inflation, exchange rate and other thematic indices and service and manufacturing activities. “We are there across the country. Our loan portfolio is well distributed across all segments. That is one of our strengths. As we are a pan-India bank, we don’t have any segment or geographical bias,” she said.
The SBI will also use public data on industrial production, international trade, commodity prices and current and futures prices in the stock markets to forecast possible expansion or contraction of the economy.
To represent the manufacturing sector, SBI will use the monthly Index of Industrial Production data rather than GDP figures, which are released ever quarter. The SBI index is built to be “conservative yet robust” in its forecast.
On the other hand, the HSBC manufacturing index is based on data compiled from replies to questionnaires sent out to purchasing executives in around 500 manufacturing companies, covering factors such as new orders, purchases, output and delivery time.
Like the HSBC indices, the SBI index is built on a scale of 0 to 100, with a number above 50 indicating growth over the corresponding pervious period and a number below 50 suggesting contraction.