Effect of monetary policy transmission on the use-based classification of manufacturing industry in India: an empirical evidence

Abstract

Purpose

This study aims to investigate the effect of monetary policy transmission on the use-based classification of manufacturing industries in India, an integral aspect influencing the overall economic growth of the nation.

Design/methodology/approach

The empirical study applies a panel autoregressive distributed lag model to examine the relationship/association between monetary policy transmission mechanism and the output of manufacturing industries in the long run and short run.

Findings

In the long run, the findings reveal a negative association between money supply and manufacturing industries’ output, indicating that an increase in money supply corresponds to a decrease in manufacturing output. Conversely, a positive relationship is observed between manufacturing industries’ output and banks’ credit, indicating that an increase in bank credit leads to a corresponding increase in manufacturing output. In the short run, the results highlight a significant positive relationship between manufacturing output and monetary policy transmission variables, including money supply, statutory liquidity ratio, real exchange rate and foreign direct investment. The use-based classification of manufacturing industries such as primary goods, capital goods and intermediate goods exhibits greater responsiveness to monetary policy shocks than consumer durables and non-durables goods.

Research limitations/implications

Policymakers are advised to regulate credit expansion to support the industry without risking financial instability, with key recommendations including stimulating consumer demand and adopting sector-specific policies to promote sustainable growth across diverse manufacturing sectors.

Originality/value

India, being a developing economy, efficient monetary policy transmission is crucial for boosting manufacturing output and employment. Nevertheless, there has been a scarcity of research concentrated on this pivotal intersection. This study aims to fill that gap, providing fresh insights into how monetary policy affects the growth of the manufacturing industry.

Citation

Sahoo, M., Mohanty, S.P. and Sahu, P. (2024), "Effect of monetary policy transmission on the use-based classification of manufacturing industry in India: an empirical evidence", International Journal of Law and Management, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/IJLMA-11-2023-0260