New Delhi: Financial market integration is crucial for regional development in Asian countries and there is a need for greater usage of local currencies to foster cross-border investment, a top RBI official said.

"...most of the Asian countries are individually linked to the global economy more as compared to the regional economy," G Padmanabhan, Executive Director, RBI, said in Singapore recently.

"Financial market integration is, however, important to the region's economic development. The slow pace and the varying degrees of integration in the region warrant concerted policy actions to surmount the constraints," he said.

There is a need for greater use of Asian currencies such as Chinese renminbi (RMB) and Indian rupee for cross-border investment and trade settlements, Padmanabhan said. This will require further market liberalization and formation of regional financial market infrastructure for clearing and settlement and hedging facilities, he said.

ASEAN countries are nowhere near forming a single market as in the EU, Padmanabhan said. There are proposals regarding the formation of an Asian Monetary Union, but these proposals have not reached anywhere, he said.

The lessons are to be learnt from the not-so-happy experience of European integration through a monetary union mechanism. However, greater integration of Asian currencies would require agreement between participating countries to be bound by collective decisions rather than bilateral ones, he added.

Asian countries have shown political support for greater financial cooperation and integration, but there is huge scope for channelizing regional savings in the region, particularly in infrastructure development, he said.

There is a need to address obstacles in areas such as differences in economic structure and development, maturity of individual markets and infrastructure, Padmanabhan said. He said the Chinese authorities have been taking a number of proactive steps toward developing an offshore market for RMB. The RBI has also taken several steps to promote rupee invoicing for trade-related transactions.

"This will also need to be accompanied by harmonization of legal and regulatory systems, market practices, rating standards, accounting and auditing practices, and withholding taxes on bond coupon payments across countries in the region," he said.

Besides, greater usage of Asian currencies would require existence of well-developed and deep forex markets, with diversified forex hedging instruments to facilitate issuance of foreign bonds in domestic markets and local currency bonds by foreign entities.


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