y v reddy : monetary co - operation in asia speech by dr y v reddy, governor of the reserve bank of india, at the imf - mas high - level seminar on asian integration, singapore, 3 september 2005. * * * mr. chairman and distinguished participants, it is a privilege to be associated with the deliberations on asian integration. singapore very vividly signifies both the diversity and potential for prosperity of the asian region. we deeply appreciate the hospitality and excellent arrangements made by the imf and mas for this high level seminar. the discussion paper circulated by the mas is of high quality and is a very useful document. this session is devoted to subjects of special interest to central banks, namely “ enhancing regional surveillance and monetary co - operation in asia ”. i intend focusing on one of the topics flagged for discussion in this session by the organizers, namely “ is there scope for co - operation or co - ordination on exchange rate policies over the long term? ” in this brief presentation, i propose to explore the following areas : first, changing dynamics of exchange rate regimes in asia ; second, importance of the asian economies for global prosperity and stability ; third, the asian dynamics of financial integration, fourth, the scope for co - operation or co - ordination on exchange rate policies ; and finally, some thoughts specific to the indian situation. changing dynamics of exchange rate regimes in asia in the period prior to the 1997 crisis, many of the asian economies followed an exchange rate regime of fixed but adjustable pegs. during the east asian crisis, it was realized that such pegs were quite vulnerable to speculative attacks. several east asian economies have adopted different types of exchange rate regimes in the post - crisis period. while some countries continued with pegged regimes, others moved over to some kind of managed floats. thus, it appears that in most economies of asia, the weight of experience seems to be tilted in favour of intermediate regimes, and post - crisis, the choice of the exchange rate regimes generally reveals a growing preference for relatively more flexible exchange rates than before. in this regard, given the current state of relatively benign international financial market conditions, it is possible to speculate that as the comfort level of forex reserves as self insurance is reached, and institutions and financial markets in asian economies acquire further resilience, this shift in preference might grow stronger and wider. the recent moves by the chinese and the malaysian authorities would only substantiate such a notion. an intermediate managed floating regime may

while cmi might have contributed to the exchange rate stability in the the asean + 3 was formed as a gathering of the governments of asean members, china, korea and japan that were asian members of asem, had its first leaders ’ meeting in december 1997. the saarc council of ministers meeting held in islamabad during january 2 - 3, 2004, desired that the saarcfinance should prepare a concept paper on the proposed south asian economic union and a south asian development bank. the asian bond fund is basically an arrangement for pooling of a portion of foreign exchange reserves of few east asia and pacific countries and the fund portfolio is invested in the liquid us dollar denominated bonds of major asian economies. 3 / 4 region, it has also contributed to closer regional economic and financial integration and co - operation. it is useful to discuss ways of carrying this process forward. there are several fora already established for regional monetary cooperation. the asian clearing union ( acu ), which was established in 1974 at the initiative of the economic and social commission for asia and pacific ( escap ) has eight member central banks. the main objective of the acu is to provide a facility to settle current international transactions among members on multilateral net settlement basis. the acu mechanism also provides for a currency swap type mechanism amongst members for trade transactions. acu aims to promote monetary co - operation amongst the members and has also resulted in closer relations across the banking systems of the member countries. during the last few years trade settled through acu mechanism has grown at a rate higher than that of total international trade of the member countries. yet another forum for exchange of views and experiences, including through visits and training programmes, is saarcfinance. areas covered in recent months include communication policies and practices of central banks and real time gross settlement systems. the recent policy shift in china from a pegged to a flexible exchange rate regime is a significant development in international finance. this step is a watershed in the financial sector reform process now underway in china. going by the available indications, china has long - term plans for development of deep and liquid markets in financial assets, which would encompass foreign exchange, bonds, and equities, as also commodities. some thoughts on india ’ s approach it may be useful to recall our experience with exchange rate management in india. in september 1975, the government of india proposed a system of determining the exchange rate based on a basket of five currencies, with weighting