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EELII moderates to 107 for January 2011
The Edelweiss ET-Now Lead Indicator Index (EELII) has moderated to ~107 for
January, lower than 110 estimated for November and stable compared to the Q3FY11
quarterly number.
EELII, a composite weighted average index of a number of macro variables exhibiting
strong predictive ability of the core trends in the Indian economy, is on a moderating
trend over the past three-four months. The indicator has been effective in capturing
the upturn in the economic cycle during the past few quarters. From a trough of ~73
in Q4FY09, the indicator touched ~128 by Q1FY11, the fastest in the current decade,
and since then it has moved lower. Accordingly, after a strong real non-agri GDP
growth of ~10% Y-o-Y in Q1FY11 and ~9.5% Y-o-Y in Q2FY11, momentum is likely to
moderate in Q3FY11 and the January number hints at further moderation in Q4FY11.
Each of the lead variables constituting the index affects the real economy with
different lead periods. For example, as per our model, the effect of change in policy
interest rates (repo rate) is most pronounced on the economy with a lead of ~9-12
months, while the impact of change in commercial vehicle production is the highest
with a lead of around three months. EELII has historically predicted non-agriculture
GDP growth closely; the adjusted coefficient of determination (adjusted R-squared) for
the multiple regression is ~0.80.
What has contributed to the softening of EELII in January?
Primary factors contributing to the moderation are the declining trend in cement
dispatches and slowing momentum in commercial vehicles’ production. These subindices,
as per our model, lead GDP growth by six months and three months,
respectively. In addition, government expenditure index growth also slowed down
sharply during Feb-April 2010, which is now reflecting in the weakness in the
government expenditure sub-index. Part of this softening trend can be explained on
the basis of an unfavourable base effect.
In Q4FY11, the effect of RBI’s policy rate normalisation, which started in early 2010,
will begin to impact EELII. However, credit growth component, which has a lead of 12
months, has started rising as lending began to pick up in Nov/Dec 2009. This
component will be increasingly supportive of growth in the coming quarters.
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