BluFin's BCI to detect economic turning points, says Thomas

A new indicator which can track what is happening in the economy, the business cycle indicator or BCI have been unveiled by BluFin today. They are very popular in the US, in giving the market or the economy direction. It helps to understand the current business cycle. BluFin's indicator suggests that the Indian economy is in a depressed state after the weak GDP and IIP numbers.

Dr. Sam Thomas, Director of Research, BluFin tells CNBC-TV18, various macro variables, including primary and secondary variables have been taken into consideration for creating the business cycle index. It will be an efficient tool for detecting a particular phase of the business cycle in the Indian economy, explained Thomas.

The weak GDP and industrial production figures suggest a well below trend growth and the BCI can actually help to detect the turning points in the business cycle, without too much volatility, said Thomas. According to him, "One of the problems we have in India is that many of our variables that catch the pulse of the economy are highly volatile. They tend to get revised and they are also released with lags of more than two months in many cases. We are trying to alleviate that issue by having an independently sourced indicator that might help all of us get a calmer reading on what's going on in the business cycle."

Below is the edited transcript of the interview on CNBC-TV18. Also watch the accompanying videos.

Q1: If you start by giving us some comparative analysis of how this indicator should be taken or read relative to other indicators like GDP and IIP which come with a bit of a lag?

A: My colleagues at BluFin and I have developed what we are calling the BluFin Business Cycle Indicator or BCI. What we do is, we study several macro variables that include primary variables and secondary variables and we have created a business cycle index that will help a person detect the phase of the business cycle that the Indian economy is in.

We have indexed this index at the number 100 in 2005 and then we traced the value of the index in real monthly time, implying that we release the number in the month that we are currently in. At this point, the value of the index is 157.61 relative to 100 in 2005 and it represents a YoY growth rate of roughly 1.33%. It has been trending down now for several months and we have a graphic that will give you a feel for how this business cycle indicator oscillates over time.

Q: With things like the IIP, it's often criticized for having too much of a skew in terms of its elements. For the business cycle, what kind of elements have you worked with and what kind of industries have you tried to span in order to come up with this figure?

A: What we do is we create panels of variables that traverse capital markets, monetary policy related signals, fiscal policy related signals, outward looking signals that capture foreign trade and the state of the global macro economy. Then we have a suite of variables related to the real economy in India. We also have a suite of variables related to service that captures sentiment, as BluFin has a consumer confident index that also comes out on a monthly basis.

It's an amalgam of many types of variables from which we extract signals from suites of these variables. We are looking for corroboration across suites of variables before we index the values.

Q: The noise around a poor macro performance has got louder in the last couple of months. What specifically has been your experience over the last three months and into this month of June where concerns are that the numbers may actually be much worse than what we have seen?

A: Yes. There is a distinct slowdown that we are detecting and we don't see a turn as yet. We feel the industrial production numbers will hover around this three month moving average of roughly negative 1% sort of a pulse or pace. In the GDP realm, the climate feels like an annualized growth rate of roughly flat 6%. That’s how it feels.

Relative to long-term averages that we have been used to, we are clearly below trend and our aim is to watch our indicator in the hope of catching turning points without too much volatility. One of the problems we have in India is that many of our variables that catch the pulse of the economy are highly volatile. They tend to get revised and they are also released with lags of more than two months in many cases.

We are trying to alleviate that issue by having an independently sourced indicator that might help all of us get a calmer reading on what's going on in the business cycle.

Q: What you are saying is demonstrated by the graph on the screen. Benchmarked against the IIP, the IIP looks very, very spiky but the BCI chart is much smoother. Looking at the data, how reliable or leading an indicator is it of IIP and GDP growth that you have seen in the past? Just to get you back to that point that you were making that it feels like 6% GDP growth as we stand today and maybe a minus 1% IIP reading?

A: The best way to think about the appealing features of this indicator is one, it's a smoother indicator. The second issue is that since we report in the calendar month that we are in, you get the reading two months ahead of IIP and of course well ahead of the GDP reading.

So, the two aspects that lead is the reporting time which is relative to the announcement time of the other indicators and the other is the fact that we can catch turning points or at least, we want to hope that we will modestly catch those turning points with a modest lead. That's our intent.

I hope that's obvious in the graphic because in the graphic, the convention is to show a March number in March, like in the case of industrial production. But the right way to show it is that the March number comes out in May. If you shifted that industrial production graph to the right, you will notice the lead as being quite pronounced in our indicator, which comes out in the current month.

Q: Just to get back to the current reading for a minute, 157.6. If you can give us a sense of what it was say 6-9 months back, the pace at which the BCI has been declining and what you meant by saying that this reading does not give you any sense of bottoming out or taking even a small upturn or being an inflection point of any kind?

A: The best way to see it is to take a look at the YoY graph. If you put a long-term average line across that graph, you will be able to see the periods of time when it's above trend and the periods of time it's below trend.

What I meant by the fact that we are heading down or decelerating is the right way to say it and that we don't see a turn yet. It's obvious in the graph where it shows that we are below trend. We have shaded the areas above trend in green and the areas below trend in red and you will notice that the most recent phase have been red for a while.

If you look at the slope of our indicator, it is still negative and so the point at which we can claim that maybe we are detecting a turn is to look at that slope. If that slope persistently turns positive, then it's possible for somebody to say that the economy appears to be troughing and as in evident in the graph that's not visible as yet.