Mibor use could get wider

Reserve Bank of India's move to get involved in its specification, if approved, would strengthen money market

The Mumbai Interbank Offer Rate (Mibor) might have a wider use in the time to come, with the Reserve Bank of India (RBI) issuing draft guidelines on financial benchmarks on Friday. According to experts, though this would take time to take effect, Mibor is set to have more standing, as it will be determined on the guidelines.

Mibor is currently a polled benchmark. The Fixed Income Money Market and Derivatives Association of India and National Stock Exchange of India Limited (NSEIL) joined hands in 2002 to publish the daily quotes. The polling process is conducted by NSEIL, where treasury officials of banks are called and asked to participate. Mibor is currently used for a majority of deals struck for interest rate swaps, forward rate agreements, floating rate debentures and term deposits.

However its application is meagre when compared with the London Interbank Offer Rate (Libor). The latter is a global benchmark for interest rates. It is used as the base for deciding interest rates on loans, savings and mortgages. It is also used as a base rate for many financial products, such as futures, options and swaps.

“This is a right step towards evolving an efficient term money market, which 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 a mirror impact on an 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 the Collateralised Borrowing and Lending Obligation market and the term Mibor market is 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 on manipulation of several key global benchmark rates such as Libor, Euribor, Tibor, etc.

Since Mibor will now be determined on RBI guidelines, its credibility is set to get a boost. “Mibor will now have more standing (for ths reason). The term repo window is getting shaped, based on which the term curve has to come. If the term curve comes in the market, then Mibor will 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.

SNAPSHOT

• Mibor is currently a polled benchmark
• It is used for deals struck for interest rate swaps, forward rate agreements, floating rate debentures and term deposits
• Application of Mibor is very meagre compared with Libor
• Libor is used as a global benchmark for interest rates