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.