Is there a Case for Exchange Rate Coordination in South Asia

TLDR: In this article, the authors evaluate the case for greater exchange rate coordination in South Asia and find limited evidence of comovement of South Asian currencies in nominal terms, while the evidence for degree of co-movement is slightly stronger in real terms.

Abstract: This paper evaluates the case for greater exchange rate coordination in South Asia. With inter-regional integration in South Asia progressing at a faster pace than the region’s integration with the world as well as the economies of South Asia being buffeted by similar external shocks there is a need for greater exchange rate cooperation among the economies of the region, while retaining the flexibility to adjust to external currencies. Using empirical methods, we find limited evidence of co-movement of South Asian currencies in nominal terms, while the evidence for degree of co-movement is slightly stronger in real terms. Much of the divergence in the movement of currencies is derived from the varied exchange rates being pursued in these economies. While India has increasingly moved towards a more flexible exchange rate regime, Bangladesh, Pakistan and Sri Lanka, continue to remain pegged to US Dollar.