Dear Reader,

(RBI Governor Shaktikanta Das: "Two years ago, around this time, when CPI Inflation had peaked at 7.8 per cent in April 2022, the elephant in the room was Inflation. The elephant has now gone out for a walk and appears to be returning to the forest. We would like the elephant to return to the forest and remain there on a durable basis.")

Once upon a time, deep in the forests of India, there was an elephant named Inflation. Nobody could remember how he came by that name, and one forest guard said the name had probably been given by a drunk economist who had gone to the forest on a safari.

Now this elephant one day ventured out of the forest and into the fields, where it gorged on wheat, cabbage, sugarcane, and other such delicacies. He liked the farmlands so much that he made his way further and further into human habitations, ravaging crops and pillaging villages.

Rumour has it that he finally found his way to Mumbai, where he settled himself comfortably in a room at the headquarters of the Reserve Bank of India. At least, that is the impression given by this limerick that was reportedly doing the rounds in the city:

"There was an elephant called Inflation

Who caused quite a sensation

When Das called him out

With a twist and a shout

Much to the elephant’s consternation."

The initial reaction, of course, was to bang pots and pans together to drive him away. Realisation soon set in, however, that while this method may have been effective against the coronavirus, it didn’t scare inflation. The cops were then set on him. But as Spike Mulligan wrote in his poem "Jumbo Jet":

"The police they put him in a cell, but it was far too small,

So they tied him to a lamp post and he slept against the wall.

But as the policemen lay sleeping by the twinkling light of dawn,

The lamp post and the wall were there, but the elephant was gone!"

Worried about the damage he might cause, the government then decided to solve the mammoth problem in a systematic way. It decided to set up a task force to force Inflation back in to the woods. They formed a committee called the MPC, short for Mad Pachyderm Committee, to fight the elephant. The RBI was redesignated as the "Inflation Targeting Central Bank".

There was some controversy about how many members the MPC should have, but it was finally settled that there would be six. The number was decided when someone recalled the famous poem “The Blind Men and the Elephant”, by John Godfrey Saxe, whose first para went like this:

“It was six men of Indostan,

To learning much inclined,

Who went to see the elephant

(Though all of them were blind),

That each by observation,

Might satisfy his mind."

That poem was taken as a sign that the MPC should have six members.

Given its jumbo task, the MPC read everything about elephants and watched the movie “Dumbo”, which featured a flying elephant, several times. They particularly watched the scene involving a pyramid of ponderous, pulsating, pulchritudinous elephants.

But first, they set themselves the task of finding out the nature of the beast. Some said it was Supply Push Inflation — the elephant was pushed out of the forest. Others said it was Demand Pull, which meant that it was pulled out of the forest. Someone else said it was people’s expectations about the elephant that needed to be watched — she termed it Inflationary Expectations. Another said that Inflation had two parts — Core Inflation and Non-Core Inflation. And all these theories called for different ways of tackling Inflation.

But people had had enough. They were getting impatient. The cry went up: "What on earth is the Mad Pachyderm Committee doing?" People wondered aloud whether it was the committee or the pachyderm that was mad. Heck, they said, cavemen could kill mammoths with sticks and stones and here was the MPC waffling on and on about a mere elephant. They pointed to how the US Federal Reserve chief had made an ass of himself by saying the elephant was transitory and wondered whether we would see the same thing repeated in India. Some said the RBI was a white elephant.

Thus it was that the MPC got down to serious discussion about the weapons needed to dispose off Inflation. One suggestion was to deny it liquidity, probably meaning that they should take away its booze. One MPC member, Michael Patra, reportedly proposed to lure the elephant back into the forest by enticing it with a bevy of dynamic stochastic elephant models.

But ultimately, it was decided that the best weapon was an elephant gun fondly nicknamed, for some obscure reason, The Repo Rate.

And thus the battle was joined and Inflation was, slowly and surely, beaten back. As Shaktikanta Das announced on Friday, the elephant has left the room. Indeed, dissident MPC member Jayanth Varma believes that the elephant has already gone back to the forest and what the rest of us are seeing is a pink elephant, a hallucination caused by being intoxicated with misguided economics. In case, you were wondering, this is how pink elephants on parade look like’.

Most don’t agree with Varma. My colleague Aparna Iyer pointed out: "There is a thing or two about elephants that we need to know. These pachyderms are slow moving and are known to take occasional long stops."

But perhaps the mood today is summed up by a quote attributed to Abraham Lincoln: "When you have got an elephant by the hind legs and he is trying to run away, it's best to let him run." When and how Lincoln became familiar with this procedure, though, is unclear.

Will the elephant go back to the forest? Or will it stop short and turn around? Gaurav Kapur, Chief Economist at IndusInd Bank, wrote about where he thinks it is headed here.

The MPC is right to keep up the good fight against inflation. What former Canadian prime minister Pierre Trudeau said about the US could well be said about inflation: "Living next to you is in some ways like sleeping with an elephant. No matter how friendly and even-tempered is the beast, if I can call it that, one is affected by every twitch and grunt."

Cheers,

Manas Chakravarty

Here, in case you missed them, are some of the stories and insights we published this week, apart from our technical picks in the equity, commodity and forex markets:

Stocks

Discovery Series | Rainbow: Can this niche play on healthcare shape up your portfolio? Goldiam International, Power Grid, With better free cash flow yields, this FMCG proxy calls for attention, Bharti Hexacom IPO, Defence Engineering quartet: Execution does not match up with expectations, Aditya Birla Fashion & Retail: Will the demerger move create value for investors? PVR Inox, VIP Industries, PI Industries, What do Q4 updates of leading banks indicate? Weekly Tactical Pick: Why you should look at this EMS player, Dabur India, SBFC Finance

Markets

3 reasons why FIIs will continue to buy Indian equities in FY25 after pumping $25 billion last fiscal

After a blockbuster rally in FY24, will markets see an encore?

What kind of returns should investors expect from Indian equities in FY25?

FPIs to lead the next leg of the rally

When NOT to trade -- a must-have skill for a successful trader

What’s behind the surge in gold prices?

Free market or investor protection, what will serve India’s F&O traders better?

Companies and sectors

Low capacity utilisation may not support cement price hikes, Ambitious targets for domestic IT market growth fly in the face of reality, Siemens, Has the sun set on solar panel manufacturers? Depleting water levels at reservoirs signal difficult times for agri-input providers, A sequential surge in demand for CVs, tractors in March, Investor message to FMCG companies in FY25: Get off your backside, How Indian pharma can score high on the innovation scale, Aditya Birla Capital, Aditya Birla Fashion-MFL demerger, JSW Energy, Competition queers the pitch for policy transmission by banks,

Financial Times

For all its faults, democracy is still better than autocracy

Larry Fink’s faith in the power of markets needs some tempering

Huge AI funding leads to hype and ‘grifting’, warns DeepMind’s Demis Hassabis

AI revolution will be boon for natural gas, say fossil fuel bosses

Diverging inflation raises prospect of rate cuts by ECB before Fed

How to squash government debt

Decoding Economics

The implications of a Chinese manufacturing recovery

Economy & Policy

South Asia has a Jobless Development problem, says World Bank

Share of informal employment rising

Green shoots in rural demand?

The hunt for critical minerals---hype and reality

Final Composite PMI for March even better than the advance estimate

Take the year-on-year core sector growth figures with a large dose of salt

What’s behind India’s improved current account

Pro Economic Tracker

What's behind the sudden boom in bank credit to MSMEs?

Cooling period for independent directors: is there a loophole

What we need to take away from the India Skills Report

Tech & Startups

A bait for Tesla

Late stage startups see a surge in funding

Premium for good governance will be very high, many took it for granted: Sachin Bansal

Geopolitics and Geoeconomics

The Eastern Window: Xi Jinping tries to charm US CEOs as foreign investment slides

For India, Saudi Arabia is both an opportunity and a quandary

India’s oil import strategy faces risks from geopolitics, rising prices

Politics

CAA no longer an election weapon for BJP

Marketing

Zomato’s green gaffe; Marketing Musings: How should marketers distribute their advertising rupees between sports and politics?

Personal Finance

Four financial rules you shouldn’t take seriously

TRUSTMF Flexi Cap Fund is in search of Gorillas. Should you join the hunt?

The first money task in the new financial year: Portfolio rebalancing

PSU, auto, infra fund categories shine in FY24; private banks disappoint

Sentiment booster is key to REITs gaining popularity

How RBI’s rules on penal charges will help loan borrowers

Why does Mihir Vora find even a high PE stock an attractive buy? It’s GARV, not GARP