In our article, 'The USD 12 bn Opportunity: Increasing transparency in India’s trucking marketplace', we highlighted the importance of a freight index and a freight exchange in the country’s trucking spot market. Here, we put forth our thoughts on potential hallmarks of a good freight index.
Imagine a regular user of any trustworthy index, who performs real financial transactions and presents insights to his/her company’s management using the index – a number or a trendline which represents the state of affairs of the market being represented and the indicator being measured. A lot rides on the index, especially when organizations are going to take decisions based on the same. Taking cues from several indices such as Brendt Crude Oil Prices, Index of Industrial Production (IIP), Baltic Dry Index, SENSEX and others, we feel that a freight index should have the following characteristics in order to be trusted and adopted.
- Transparent logic: The entire computation logic needs to be published alongside the indices in order to improve believability and reduce ambiguity.
- Credibility: The index should be reflective of actual indicators (prices, rates, volumes) and hence one should use more of actual than imputed data.
- Regular refresh: The index needs to be updated on a periodic basis. Thus, only those data sources and categories with regular updates should be used. For example, one cannot use routes or markets where the transaction happens once a month for a daily refresh. The more frequent the update – less the number of data points available per update. Hence, one should be cognizant of the trade-offs and perform refreshes accordingly at a suitable frequency.
- Consistency in logic: The lanes used, weights assigned, granularity should be maintained period on period. This implies that one cannot change the lanes, weights and granularity for a given time series of index. In the future, one can start off a new series, if based on or started from a different reference month.
- Usability: The index should be useful to the user in the maximum possible way with least additional assumptions. Hence the index should be:
- Comprehensive: The sub-indices should be representative of the entire market. Hence should have all possible distance bands, zones, most common truck types.
- Granular: The granularity should be such that each user can use the most granular index to infer the spot market movement for his own volume / network mix
- Representative: The most granular index should be a measure of at least 4-5 lanes to cover most directions of travel from the source. The count of lanes however is limited by number of data points available.
- Universality: The index should be universally accepted and understood. Take the case of Container, 32ft mxl, ex North for 750+ km haulage. It is difficult to represent trends on the entire population of lanes in this bucket with solely with trip prices or price per ton. Hence, the trend of freight rates on this combination needs to be represented in INR per ton-km as it is universally accepted and can easily be used by users for their own network footprint.
- Scalability: The index should meet all bars on credibility and regulatory requirements for any new developments, now or in the future, built upon the index. For example, if a derivative product is built on the index, the underlying data should be reflective of highly liquid transactions and meet any legal criteria required.
We have tried to adhere to the same principles while designing and building the National Freight Index. Please refer to our write-up on NFI's computational methodology to learn more about the same.