Central banks are supposed to offer clarity when markets cannot assess the risks they face or even join the dots of economic data to arrive at a reasonable outlook.

Unfortunately, beyond the usual rhetoric and the unusual margin of rate cut, India’s central bank offered little in terms of clarity on Wednesday. The muted reaction from the bond market on a larger-than-expected rate cut is proof that the Reserve Bank of India (RBI) left them wanting on guidance. Even equity indices looked the other way, having been preoccupied with the disappointing earnings of companies.

In fact, RBI governor Shaktikanta Das’s explanation of the rationale behind the unusual 35 basis point cut (bps) in the repo rate did more harm than good. Das said he and the other five members of the monetary policy committee felt the current deepening growth slowdown warranted a cut more than the usual 25 bps but 50 bps would have been excessive. Bond yields climbed briefly as traders took this as hesitance to cut more. “When they said 50 bps would have been excessive, market was taken aback a bit," said Jayesh Mehta, managing director and country treasurer at Bank of America Merrill Lynch.

Das was also vague on the central bank’s assessment of the current slowdown. Although he said that the slowdown was cyclical, he was quick to add that his assessment is premature. The steady fall in household savings and the recent slowdown in demand for even staples indicate that there could be a structural element to the slowing economy. If this is true, Das’s wishy-washy statement on growth shows that either RBI doesn’t know the reasons for the slowdown or it perhaps does not agree with the assessment of the market. Both cases are detrimental to market sentiment.

To its credit, RBI cut its forecast of GDP growth for FY20 to 6.9% from 7% stated in the previous policy and gave enough warnings on downside risks. This has buttressed the expectations of more rate cuts going ahead. “The revision of the GDP growth from 7% to 6.9% is paltry and somewhat dissonant with the characterization of the economic situation," wrote Abheek Barua, chief economist of HDFC Bank Ltd, in a note.

But perhaps the most disappointing was the total absence of clarity on liquidity. Das didn’t go beyond the central bank’s traditional assurance of being committed to offer liquidity to productive sectors. This along with no indication of a promised liquidity framework left investors wanting.

With no clarity on economic growth revival, liquidity and even the crisis surrounding non-banking financial companies, the markets are left with hopes and speculation. The only certainty of the size of a rate move has also been done away with the unusual size of the cut this time. RBI has just added more confusion to an already flummoxed market.

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