The innovation channel of monetary policy and credit supply shocks on firm investment: Evidence from R&D-intensive firms in India

The paper empirically examines heterogeneous responses of firm investment to monetary policy and bank credit supply changes for R&D-intensive and non-R&D-intensive firms, using Indian firm-level data during 2002–2024. R&D projects are typically characterized by long gestation periods, higher informational opacity, and heavy reliance on external finance, which together amplify financial frictions, resulting in credit rationing and heightened sensitivity to liquidity conditions. Using panel regressions and local projection impulse responses, the study yields the following findings: First, monetary tightening and expansionary bank credit supply exert a significantly stronger effect on the investment of R&D-intensive firms compared to non-R&D-intensive firms. Second, the subsampling analyses reveal that the differential responses of these groups cannot be solely attributed to the degree of financial constraints faced by them, but also to the inherent characteristics of innovation-driven investment, suggesting the presence of an additional “innovation-based” channel in the transmission of monetary policy and credit supply shocks. Lastly, extending the analysis to firms' financial performance metrics such as sales, cash flows, net worth, borrowings, and SG&A expenses suggests that heightened sensitivity of R&D-intensive firms to policy shocks transcends beyond investment levels to broader aspects of financial performance, reflecting multiple channels of policy transmission.