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

Mrutyunjaya Sahoo, Shiba Prasad Mohanty and Praveen Sahu

International Journal of Law and Management, 2024, vol. 67, issue 6, 654-676

Abstract: PurposeThis 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/approachThe 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.FindingsIn 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/implicationsPolicymakers 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/valueIndia, 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.

Keywords: Monetary policy transmission; Manufacturing industries output; Panel ARDL model; India (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eme:ijlmap:ijlma-11-2023-0260

DOI: 10.1108/IJLMA-11-2023-0260

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