Financial contracts are priced, settled, and valued using financial benchmarks.

Financial Benchmark India Private Limited administers debt, interest rate, and forex exchange benchmarks in India. It manages the Mumbai Interbank Outright Rate, Mumbai Interbank Forward Outright Rate, Market Repo Overnight Rate, Forward Premia Curve, Foreign Currency Rupee Options Volatility Matrix, and Rupee Reference Rates.

The Reserve Bank of India is the main regulator for such financial benchmarks.

Mumbai Interbank Forward Outright Rate is a key benchmark used by banks to price financial contracts and value assets and liabilities.

What is MIFOR?

Mumbai Interbank Forward Outright Rate is a benchmark rate used by banks for setting financial contracts such as forward rate agreements, interest rate swaps, and other derivative instruments.

Mumbai Interbank Forward Outright Rate is like Mumbai Interbank Outright Rate except that it also uses an element of currency exchange.

In India, this rate is mainly used by authorized dealers for pricing and settlement of interest rate swaps transactions referenced to MIFOR.

The banks providing currency swaps to corporations and financial institutions for hedging their long-term foreign currency borrowings use MIFOR swaps to price the currency swaps and cover their positions.

This benchmark rate is also used by banks for pricing long-term forex forwards in the absence of a liquid market.

Mumbai Interbank Forward Outright Rate is the synthetic term Rupee rate derived from the US Dollar London Interbank Offered Rate and forward premium.

The MIFOR is published for five tenors, i.e., 1 month, 2 months, 3 months, 6 months, and 1 year, along with an overnight rate at 5 PM IST daily and is used for interbank transactions only.

Below is the latest data for MIFOR published by Financial Benchmarks India (Private) Limited from February 2022 to January 2023.

The UK Financial Conduct Authority ceased the use of LIBOR as a benchmark rate on December 31, 2021, after discovering its manipulative practices.

The Reserve Bank of India continues to allow contracts referencing MIFOR after December 31, 2021, only for the purpose of managing risks arising out of LIBOR/MIFOR referenced contracts undertaken on or before December 31, 2021.

Financial contracts in India now use Adjusted MIFOR and Modified MIFOR instead of LIBOR.

Impact of LIBOR Transition on MIFOR

In 2012, several banks were accused of manipulating the London Interbank Offered Rate to profit from LIBOR-based contracts during and after the 2007-2008 financial crisis. During this market uncertainty, banks underreported their borrowing costs.

LIBOR used a polling method in which banks would provide bid and offer rates.

The UK Financial Conduct Authority announced on March 5, 2021, based on Wheatley's review of the LIBOR 2012 committee, that:

1) All LIBOR benchmarks for Sterling, Euro, Swiss Franc, Japanese Yen, and US Dollar 1-week and 2-month rates will be terminated on December 31, 2021.

2) By June 30, 2023, all US Dollar LIBOR overnight, 1-month, 3-month, 6-month, and 1-year benchmark rates will be discontinued.

The UK Financial Conduct Authority suggested using an alternate reference rate that retains LIBOR's benefits while being based on liquid market transactions.

India uses the transaction-based US Secured Overnight Financing Rate for MIFOR calculations now.

For legacy contracts, adjusted SOFR replaces USD LIBOR with adjusted MIFOR. Thus, adjusted MIFOR for legacy contracts is calculated using adjusted SOFR and USD INR forward premia.

For new contracts, Modified MIFOR will use the SOFR index without any spread adjustment value for all new contracts. The FBIL Modified MIFOR Curve is calculated using the Adjusted SOFR rate and FBIL Forward Premia rate by Financial Benchmark India (Private) Ltd.

The Clearing Corporation of India found that the FBIL MIFOR curve using LIBOR differed from the MIFOR computed using Adjusted SOFR replacement rates and the fallback rate for tenors beyond 3 months.

The study also suggested using a forward rate as a single estimate rather than an average realized during the forward tenor period to compute the FBIL MIFOR curve using the fallback rate.

Benchmark fallback rates are the replacement rates that would apply to financial contracts with rates referencing a particular benchmark.

Sources: Reserve Bank of India, Clearing Corporation of India and Financial Benchmark India Private Limited