During its monetary policy meeting on Friday, Reserve Bank of India Governor Shaktikanta Das proposed to set up a committee to do an in-depth analysis of the current Mumbai Interbank Offer Rate (MIBOR) benchmark issues. Apart from this, the committee will also study the need for transition to an alternate benchmark and also provide suggestions for the way forward of this interest rate benchmark mechanism.
The RBI noted that MIBOR-based overnight indexed swap (OIS) contracts are most widely used interest rate derivative (IRD) in today’s onshore market.
The recent steps taken by the RBI have diversified the participant base and also facilitated the introduction of new IRD instruments. As a direct result of these development steps, the usage of MIBOR-based derivative contracts has increased.
However, the RBI noted that at the same time, “the MIBOR benchmark rate, calculated based on call money deals executed on the NDS-call platform in the first hour after the market opening, is based on a narrow window of transactions.”
The RBI also noted that globally, there has been a “shift to alternate benchmark rates with wider participant bases (beyond banks) and higher liquidity.” And hence taking these developments into consideration, the RBI proposed to to set up a MIBOR committee.
What Is MIBOR?
Mumbai Inter-bank Offer Rate (MIBOR) is a financial benchmark rate for interest rate swaps, overnight call money, collateralised borrowing and lending obligations (CBLO), floating rate bonds, and short-term corporate loans in India. It is the rate at which Indian banks borrow from one another on an overnight basis. It was first introduced in India in 1998 after the formation of the Fixed Income Money Market and Derivatives Association of India (FIMMDA).
The National Stock Exchange (NSE) was assigned to calculate and publish the rate. NSE launched and developed the NSE Mumbai Interbank Bid Rate (MIBID) and NSE Mumbai Inter-bank Offer Rate (MIBOR) for the overnight money market on June 15, 1998. Later, it introduced 14 days MIBOR on November 10, 1998 and one and three months MIBOR in December 1998.
Vinod A N, GM and Head, Treasury of South Indian Bank, said, "MIBOR is the acronym for Mumbai Interbank Offer Rate, basically the yardstick of the Indian call money market. It is used as a reference rate for floating rate notes, corporate debentures, term deposits, interest rate swaps and forward rate agreements. The pricing of overnight indexed swaps (OIS), a type of overnight interest rate swap used for hedging interest rate risk is based on overnight MIBOR. There are multiple usage of MIBOR from pricing of assets and liability products."
The modalities of operation and calculation were based on London Interbank Offer Rate (LIBOR). "MIBOR is calculated on similar lines as LIBOR which is London Interbank Offer Rate and “was a benchmark interest rate at which major global banks lent to one another in the international interbank market for short-term loans,” says Ritika Chhabra, economic and quant analyst, Prabhudas Lilladher, a stock broking firm.
However, LIBOR was phased out from January 1, 2022.
Post the LIBOR Scandal of 2012, in which it was found that many banks manipulated their rates to take advantage of higher rates. In this scandal, Barkelys Bank had to pay around $453 million as a penalty and many of the top executives of banks and hundreds of traders were sacked. To bring more transparency to the system, the new entity Financial Benchmarks India Limited (FBIL) was formed in 2014. Currently,
FBIL administers benchmarks relating to the money market, government securities, and foreign exchange in India. It has been announcing the benchmark rates since July 2015. “Post GFC, a lot of concerns about the manipulation of LIBOR arose. Incidents about LIBOR rate being rigged as banks were reporting low rates to make the bank look stronger than it was and reporting false rates to profit on LIBOR-based financial products,” says Chhabra.
FBIL announces the benchmark rate for Overnight (MIBOR) daily, except Saturdays, Sundays, and local holidays. The benchmark rate is calculated based on the actual call money transactions data obtained from the NDS-call platform of Clearing Corporation of India Ltd (CCIL). The rate is announced at 10.45 AM every day.
How Do They Calculate Rate?
According to FBIL, all trades executed on NDS-Call systems, excluding reciprocal and reported deals within the First One Hour of trading, is used for computation of benchmark. A minimum of 10 trades with an aggregate traded value of Rs. 500 crore and more in the NDS-Call segment is taken as the threshold criteria for estimation of the volume weighted average rate. In case either of the criteria mentioned above is not met, the timeframe for computation of rates is extended by 30 minutes first and if both the threshold criteria are still not met, then by another 30 minutes. If both the threshold criteria are still not met after the two time extensions, no rate computation is initiated and the previous day’s values is used for dissemination.
What Does This Announcement Mean?
According to Chhabra, RBI's latest announcement to adopt alternate benchmarks over MIBOR is in line with international practice. “Although based on actual transactions, MIBOR rate is also decided by a few big banks and hence, based on a very narrow pool of transactions. The policy decision of replacing MIBOR with a broad-based liquid benchmark is in the right direction to bring about greater transparency and avoid any manipulation or rigging of the rate,” she added.
