THE ECONVERSE

a student led initiative of

SCHOOL OF ECONOMICS, UNIVERSITY OF HYDERABAD

Economics is the science of trust. The currency is an instrument, which is

upholding such trust. The society interacts with such a structure of money
and finance with varying dynamics and it's in the domain of economics
enquiry to find patterns of such interaction and story around it. This little
attempt was to unravel and narrate stories around economics and finance.

Ernst and Young (EY), in its Economy Watch of December 2022, while
analyzing the quarterly estimates of the national accounts has signaled that
the Indian economy has been transiting towards normalization from the
pandemic shock. The second quarter estimates of the National Statistics
Office (NSO), which were released at the end of November 2022 has
some good insights into the economy. The real GDP estimate has grown
by about 6.3% in the second quarter of the current financial year (Y-o-Y
growth in comparison to the same quarter of last financial year). The real
GVA has grown about 5.6% in the second quarter of the current financial
year (Y-o-Y growth in comparison to the same quarter of last financial
year). However, to weed out the effect of the pandemic and base effects,
we have to make a comparison with the second quarter of 2020. Such
comparison suggests that the real GDP and GVA has grown about 7.6
percentage points.

High Frequency Indicators like Purchasing Managers' Index (PMI) has

also shown some improvement from the month of October to November
2022. The IHS Markit India composite PMI has also grown from 55.5 to
56.7 from October to November 2022 (data sourced from CMIE). But on
a Y-o-Y basis, the index showed a dip from 59.2 (November 2021) to 56.7
(November 2022). The Index of Industrial Production (IIP) estimate of
October 2022 has stood at 129.6, which is lower relative to the September
2022 estimate of 134 (CMIE).
Jan 2023

The estimates suggests ( that the CPI headline inflation has dropped down
to 11 month low of 5.88% points. This outcome is partly the result of the
fall of vegetable prices, though the inflation in cereals and milk products
remained high. The Reserve Bank of India (RBI) in its Financial Stability
Report, December 2022 has signaled the caution though the CPI headline
seemed to be moderated.
 The Controller General of Accounts (CGA) data for the end of November
suggests that about 63.3 % of budgeted tax revenue estimates has already
been accumulated. During the April - October of the current financial
year, the direct and indirect taxes showed a growth of about 25.9% and
11% respectively. These two observations along with high growth in
capital expenditure by the government (61.5% rise in capital expenditure,
as noted by EY Economy Watch for time period, April - October FY23)
suggests that fiscal position of the country is reasonably sound.

The bank credit for the nonfood segment has grown from about
12522693.84 crore in September 2022 to 12863462.71 crore in October
2022 (RBI DBIE). The rise is real as the credit in October 2019 is about
9770784.31357 crores (pre pandemic era). With grave fears of inflation,
RBI has increased the repo rate by another 35 basis points to reach 6.25%
in December 2022 monetary policy review. This hike has been warranted
on account of breach of upper tolerance limit of inflation for consecutive
10 months.

The Organization for Economic Cooperation and Development (OECD)

Economic Outlook, November 2022 has stated Indian Growth to be 6.6%
points. This is much higher than OECD countries growth rates, which is
projected to be 2.8% points. The OECD moderated growth rate is
attributed to the slowdown in the OECD economies. The high inflation
and further calibrated monetary stance and the supply side bottlenecks
along with global slowdown fears are haunting the global economies. The
OECD projected the global economic growth to be 3.1% for the year
2022.

The year 2022 has been a turbulent year with post pandemic persistence
shocks, geopolitical tensions and the supply chain bottlenecks induced
inflation hike. This macro financial situation has not much affected the
JAN 2023

functioning of financial markets which raided on the impressive note

through the year with intermediate breaks of slump.

Given this introduction to broad macroeconomic and financial

construction, we now take the journey towards predicting some
macroeconomic indicators and the volatility of the financial market.
Happy Reading!
Forecasts for Purchasing Managers' Index
The Month-over-Month (M-o-M)
change data is considered to predict the
rate of growth of Purchasing Managers'
Index over two consecutive months.
The forecast estimates of the authors
suggests that PMI will grow by around
12% in January(M-o-M). This can be
attributed to relaxed rigidities in supply
chain and transition towards post
pandemic times as highlighted in
introduction. The PMI growth might
fall to 1% in February 2023 due to large
base in January 2023.

Source: CMIE and authors' calculations

Forecasts for Consumer Sentiment Index

The Month-over-Month (M-o-M)
change data is considered to predict the
rate of growth of Consumer Sentiments
Index over two consecutive months.
The forecasts estimates of author
suggests that consumer sentiments
index will grow by around 8.5% in
January after dampening trend in 2022.
The dampening trend in 2022 can be
attributed to pandemic reversal fears,
the hawkish policies to curb inflation
and fears of recession. The forecasts also
suggest more improvement in February

MACRO FORECASTS
2023, a growth by about 15% over the
previous month.
Source: CMIE and authors' calculations

Forecasts for Consumers Price Index

The Month-over-Month (M-o-M)
change data is considered to predict the
rate of growth of Consumer Price
Index over two consecutive months.
The CPI has fallen for month of
November 2022 partly due to fall in the
vegetable prices. Our forecast estimates
suggests a rise in CPI in December
2022 and January 2023. This trend is
also signaled by the central bank in its
Financial Stability Report.

Source: CMIE and authors' calculations

 Volatility forecasts for BSE Indices
The adjacent considers the volatilities
of different BSE Indices based on
market capitalization. The shaded
region, indicating the out of sample
volatilities forecasts predicts a
declining trend of volatilities post a rise
on the eve of new calendar year (peak
from 27th December to 2nd January).

Source: BSE and authors' calculations

Volatility forecasts for BSE Sectoral Indices

The sectoral indices are chosen on the
basis of higher compounded gains and
losses from the BSE. The out of sample
forecasts predicts the decline of
volatilities in BSE Information
Technology, BSE Industrials and BSE
Goods. The BSE Power Index
maintains same volatilities for out of
Volatility Forecasts

sample time period. The forecasts

suggests the normalization of
volatilities post the rise on eve of new
calendar year.

Source: BSE and authors' calculations

Volatility forecasts for Equities

The most actively traded equities by the
volume are selected for the forecasts.
The Yes bank which has shown higher
volatility in this year post acquisition of
stressed loans by JC Flowers ARC and
SBI being played godfather role. The
volatility forecasts of Yes Bank suggests
a constant volatilities after a rise during
initial periods. The PNB volatility has
remained low and its being actively
traded on account of hawkish policy
rate regime and strengthened balance
sheet. The Vodafone Idea Ltd and SAIL
volatilities are expected to remain low
with marginal rise later this month.

Source: BSE and authors' calculations

The Indian Economy and its financial markets have remained more or less
volatile in the preceding year. With decent growth forecasts by OECD,
India seemed to be placed well comfortably among all the other economies
including the developed nations. The expansion in the consumer sentiments
and the purchasing managers index seems to lay good sound rational to
expect a decent revival in Indian Economy. The volatility forecasts for few
days ahead in the financial markets suggests a relatively low volatility (Sensex
- Large, Medium and Small cap). However, as cautioned by the central bank
and forecasted by our estimates, there is a risk of inflation still in the
economy. If such rise in inflation, again warrants the rise in the policy rate
then financial markets may turn volatile indicating the arrival of information
about the hawkish rates.

Given the brilliant fiscal space augmented by good collections of tax

revenues, the space has to be used with caution. The capital expenditure can
be encouraged with a overlook at the impact of it on the inflation. The
productive investment can be made using such space to build more resilient
economy for sustaining against the external shocks. In such scene, the
budget ahead will be the key plan document to watch out for. The
allocations out of it will lay foundations for months ahead in coming fiscal
year.

Authors
at glance
Abhai Biju
Rudra Akshay Kumar
We thankfully acknowledge the valuable suggestions and inputs from

Prof. Debashis Acharya, Prof. S Raja Sethu Durai and Dr. Alok Kumar Mishra

For feedbacks, suggestions and comments, please write to us at :

econverse.uohyd@gmail.com

Disclaimer
The views, opinions and estimates expressed in this issue are solely of the authors only