MIBOR may have a wider use with RBI's involvement in its determination

MIBOR may have a wider use with RBI's involvement in its determination

The Mumbai Interbank Offered Rate (MIBOR) may have a wider use in the time to come with the Reserve Bank of India (RBI) coming up with the draft guidelines on financial benchmarks last Friday. According to experts through this would take time to come into effect, but the MIBOR is set to have more standing as it will be determined based on RBI guidelines.

The MIBOR is currently a polled benchmark. Fixed Income Money Market and Derivatives Association of India and National Stock Exchange of India Limited (NSEIL) joined hand in 2002 to publish the daily quotes on MIBOR. The polling process is conducted by NSEIL where treasury officials of banks are called and asked to participate for the poll. The .MIBOR is currently used for majority of deals struck for interest rate swaps, forward rate agreements, floating rate debentures and term deposits. However its application is very meager when compared with the London Interbank Offered Rate (LIBOR). LIBOR is used as a global benchmark for interest rates. It is used as the base rate for deciding the interest rates for loans, savings and mortgages. At the same time it is also used as a base rate for many financial products which includes futures, options and swaps.

"This is a right step towards evolving an efficient term money market which in turn will lead to effective monetary policy transmission. RBI has been concerned on lack of price pass-through on its rate actions whereas such actions will have mirror impact on efficient term MIBOR structure with linkage to deposit and lending rates. It is a long way to go from here given that even an overnight MIBOR market is shallow with flows driven into Collateralized Borrowing and Lending Obligation (CBLO) market and term MIBOR market non-existent. RBI should develop and evolve a term MIBOR curve through deposit pricing and build linkage to credit pricing,&" said Moses Harding, group chief executive officer (liability and treasury management) & chief economist, Srei Infrastructure Finance.

The significance of these financial benchmarks emerged following the revelations regarding manipulations of several key global benchmark rates like LIBOR, EURIBOR, TIBOR, etc. Since the MIBOR will not be determined based on RBI guidelines, its credibility is set to get a boost. "The MIBOR will now have more standing because it will be determined based on RBI guidelines. The term repo window is getting shaped and based on which the term curve has to come. If the term curve comes in the market then MIBOR will also have a larger role. Over a period of time inter-bank term money quotes will be based on the term curve. At that time MIBOR may also be used for pricing of  money market instruments,&" said S Srinivasaraghavan, head of treasury at Dhanlaxmi Bank.

Key points

-- MIBOR is currently a polled benchmark.

-- MIBOR is used for deals struck for interest rate swaps, forward rate agreements, floating rate debentures and term deposits.

-- Application of MIBOR is very meager compared with LIBOR.

-- LIBOR is used as a global benchmark for interest rates

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