The loss of monetary independence arising from a common currency in south Asia will have non-negligible costs for SAARC economies, according to optimal currency criteria, given the absence of closely synchronised exogenous shocks across the region. But the absence of synchronised real shocks in the past is not necessarily a reason for rejecting moves towards a common currency. In fact, with the weight of global empirical evidence, it seems clear that a common currency will facilitate greater economic integration within the south Asian region. But the potential risks of a common currency regime should not be underestimated, particularly because trade, investment and factor market linkages are still at a low level. Major policy induced barriers to the movement of goods, capital and people in the region remain. Moves towards closer monetary cooperation would be more credible if they were combined with rapid progress in these areas.
