The Reserve Bank of India (RBI) is expected to keep the repo rate steady in its upcoming policy meeting next week, as the country's GDP growth has slowed significantly in the second quarter of FY25. However, the chances of a rate cut in February have increased, according to a recent report from HDFC Bank.

India's GDP growth for the second quarter of FY25 slowed to 5.4%, down from 6.7% in the first quarter. Gross Value Added (GVA) growth also decreased to 5.6% in Q2 from 6.8% in the previous quarter, reflecting a broad slowdown across the economy.

The report said, "We anticipate that the RBI will keep the policy rate unchanged at its meeting next week, although the likelihood of a rate cut in February has increased following weaker-than-expected GDP data."

The report also highlighted signs of weakening demand, especially in urban areas. Consumption growth slowed, and there was a notable dip in leveraged consumption, such as unsecured retail lending, including personal loans and credit cards.

It further added, "Overall investment growth also moderated, with government capital expenditure lower than last year, and private investment remaining subdued."

However, the report provided some optimism, predicting a recovery in rural demand in the second half of the fiscal year. This rebound is expected to be driven by strong agricultural performance, government scheme payouts, and increased government spending, which could boost economic activity.

The report concluded, "A recovery in rural demand, fueled by strong agricultural performance and government scheme pay-outs, along with higher government spending, is expected to drive economic activity in the second half of the year."

At its last meeting in October, the RBI’s Monetary Policy Committee (MPC) had kept the repo rate unchanged at 6.5% for the tenth consecutive time. Following the latest GDP data, the chances of a rate cut in February have increased. However, for now, the RBI is likely to take a cautious approach and maintain the current policy rate in its upcoming meeting.

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