Liquidity-driven Monetary Policy and Manufacturing Growth in India: Evidence from the RBI’s Operations

This study examines how central bank liquidity interventions influence the growth performance of nine distinct classifications of manufacturing sectors in India. The study focuses on the role of liquidity-driven monetary policy measures in shaping manufacturing output and sectoral expansion. To investigate these relationships, the analysis applies panel fully modified ordinary least squares and dynamic ordinary least squares models for long-run estimation, while the panel Granger non-causality test is applied to capture short-run dynamics. Findings reveal that excess liquidity through monetary policy, as proxied by sustained expansion in the supply of money, may exert a dampening effect on manufacturing output, indicating the importance of liquidity quality and absorption capacity in the long run. Conversely, the article finds a robust positive association between manufacturing output and sector-wise bank credit (BC) in the long run, highlighting the importance of credit flow as a productive channel of liquidity transmission. Short-run results show both bidirectional and unidirectional causality between the supply of money, interest rate and BC and the output of manufacturing growth. So, the study recommends that the Reserve Bank of India should adopt a balanced approach to liquidity formation, ensuring an adequate flow of credit to manufacturing sectors.