The Reserve Bank of India (RBI) is anticipated to maintain its policy rate during the upcoming monetary policy meeting next week. This decision follows a significant slowdown in India’s GDP growth in the second quarter of FY25. According to a recent report by HDFC Bank, the GDP growth for Q2 FY25 slowed to 5.4% year-on-year, a considerable drop from 6.7% in Q1. Additionally, Gross Value Added (GVA) growth moderated to 5.6% in Q2 from 6.8% in the previous quarter, pointing to a broad-based economic slowdown.

The HDFC Bank report highlights that, despite the current slowdown, the RBI is expected to keep the policy rate unchanged at 6.5% in the upcoming meeting, marking a wait-and-watch approach as the central bank assesses economic conditions. The Monetary Policy Committee (MPC) had previously kept the policy repo rate unchanged at 6.5% for the 10th consecutive time during its October meeting. However, the weaker-than-expected GDP data has now increased the likelihood of a rate cut in the February 2025 policy meeting.

GDP Growth and Economic Slowdown

The slowdown in GDP growth has raised concerns about the health of the Indian economy. The decline in Q2 FY25 GDP growth to 5.4% marks a significant shift from the previous quarter’s performance, where 6.7% growth had been recorded. The GVA growth—a key indicator of economic activity—also showed signs of slowing down, dropping from 6.8% in Q1 to 5.6% in Q2. This slowdown reflects a broad-based weakness in the economy, with key sectors such as consumption and investment showing signs of strain.

The HDFC Bank report pointed out that the demand side of the economy is showing signs of weakness, particularly in urban areas. Consumption growth has been notably slower, with indicators pointing to a drop in urban demand. This trend is also visible in the moderation of leveraged consumption, where there has been a slowdown in unsecured retail lending, including personal loans and credit card growth. The report also highlighted that investment growth has moderated, with government capex spending tracking lower than last year and private investment remaining muted.

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Rural Demand Recovery Outlook

Despite the challenges on the demand side, the report expressed optimism about the recovery of rural demand in the second half of FY25. The recovery is expected to be driven by strong agricultural performance, payouts under government schemes, and increased government spending. These factors are anticipated to boost economic activity, especially in rural areas, which have historically been a key driver of India's economic growth.

The optimism around rural demand is grounded in the belief that agricultural performance will continue to remain strong, providing a solid foundation for rural incomes and consumption. The government schemes aimed at improving rural welfare and the increased government spending in sectors such as infrastructure are expected to help drive economic recovery and offset some of the weaknesses observed in urban areas.

RBI's Stance on Monetary Policy

As the RBI prepares for its upcoming meeting, the central bank is expected to take a cautious stance due to the slower-than-expected GDP growth and weakening consumption patterns. While the immediate policy decision is likely to maintain the current policy rate, the HDFC Bank report suggests that the possibility of a rate cut in February 2025 has increased, especially if economic conditions do not improve in the coming months. The RBI's approach to monetary policy will continue to be shaped by economic data, and the central bank's primary focus will remain on fostering sustainable economic growth while managing inflationary pressures.

The Road Ahead for India's Economic Growth

India’s economy faces a critical period as it navigates the post-pandemic recovery phase, with key sectors such as investment and consumption still grappling with slowdowns. The outlook for rural demand presents a hopeful sign for the second half of FY25, but much will depend on the strength of the agricultural sector, the effectiveness of government schemes, and the trajectory of government spending.

As for monetary policy, the RBI’s decisions will likely remain data-dependent in the coming months, with the central bank expected to continue its wait-and-watch approach in light of the uncertain economic environment. If growth continues to underperform, there is a growing likelihood that the RBI will opt for a rate cut in the February policy review, signaling a shift towards a more accommodative stance to support economic recovery.

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