The Reserve Bank of India (RBI) is expected to maintain its policy rate during its upcoming meeting next week, as GDP growth slowed significantly in the second quarter of FY25. However, the likelihood of a rate cut in February has increased, according to a report by HDFC Bank.

The country's GDP growth for Q2 FY25 slowed to 5.4 per cent year-on-year, down from 6.7 per cent in Q1. Gross Value Added (GVA) growth also moderated to 5.6 per cent in Q2 from 6.8 per cent in the previous quarter, highlighting a broad-based slowdown in the economy.

"We anticipate that the RBI will maintain the current policy rate at its meeting next week, although the likelihood of a rate cut in the February policy has increased post this weaker than expected GDP data," the report stated.

The report pointed out that the demand side showed signs of weakness. Consumption growth slowed, particularly due to weaker urban demand, as seen in high-frequency indicators. Moderation in leveraged consumption was also noted, with lower growth in unsecured retail lending, including personal loans and credit cards.

"Furthermore, overall investment growth also moderated as government capex spending tracked lower compared to last year and private investment remained muted," it added.

On a positive note, the report suggested that rural demand is likely to recover in the second half of the fiscal year. This optimism is based on strong agricultural performance, payouts under government schemes, and increased government spending, which could drive economic activity.

"A recovery in rural demand - driven by strong agricultural performance and government scheme pay-outs, along with increased government spending, is expected to drive economic activity in the second half of the year," it said.

In its last meeting in October, the Monetary Policy Committee (MPC) meeting of RBI kept the policy repo rate unchanged at 6.5 per cent for the 10th consecutive time.

Now, as per report, the weaker-than-expected GDP data has increased the chances of a rate cut in February. For now, the report noted that the RBI is expected to adopt a wait-and-watch approach, keeping the current policy rate unchanged in its upcoming meeting.

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