Libor-like rate to help fasten policy transmission: Analysts

They say a benchmark interbank rate will be more transparent as marginal cost of funds will be determined by the market

The Reserve Bank's plan to introduce an external benchmark rate, like the Libor, for better pricing of various financial products is likely to speed up the monetary policy transmission process, analysts said.

"Hope is that external benchmark will reflect banks' marginal cost of funds and it will lead to faster transmission of policy rates," Karthik Srinivasan, co-head,financial sector ratings at domestic rating agency Icra Ratings told PTI.

RBI Governor Raghuram Rajan on Friday said that the central bank aims to move towards capital account convertibility as also set up a system where loans could be benchmarked against market rate, alike London Interbank Offered Rate (Libor).

"Over the long-term, we need to look at the base rate concept. Typically, it is a rate which you give to customer and below which you cannot charge ... Can we move towards something which is more of a market benchmark so that banks do not have to worry continuously about where they set their own base rates?" Rajan had said.

A number of countries have a market benchmark, for example the Libor in the London market.

BSE chief Ashish Kumar Chouhan said: "For the public, a benchmark interbank rate, which will see practically the end of the base rate that is arbitrarily fixed now, will be more transparent and market driven as marginal cost of funds will be determined by the market".

According to analysts, a country cannot have full capital convertibility without having an interbank benchmark rate or in other words creating an interbank benchmark rate is basically a precondition for rupee convertibility.

"The proposed full capital convertibility is not possible without an interbank benchmark rate, while you can have an interbank benchmark even without full convertibility," Chouhan said, adding having such a rate brings in more transparency and better pricing.

The new benchmark will help banks determine their lending rates and can help them will move away from the present base rate concept which isn't fixed transparently now.

"We are also going to have financial benchmarks on money market rates, for example, so that banks can use that to determine their lending rates.

Instead of having a base rate, use the short-term, medium-term money market rate, just like Libor, we want to move towards that quite quickly," Rajan had told reporters in a post-policy meeting last week.