Financial benchmarks are prices, estimates, rates, indices, or values that market participants employ for the pricing, settlement, and valuation of financial contracts.

Reference Rates are used to appraise financial contracts based on benchmarks.

The Reserve Bank of India administers money market benchmarks such as Mumbai Interbank Outright Rate, Mumbai Interbank Forward Offer Rate, and Market Repo Overnight Rate.

Reference rates represent the market rate on a specific day or time. The Mumbai Interbank Outright Rate has been the most widely used financial benchmark rate in India.

What is MIBOR?

The Mumbai Interbank Outright Rate is the interbank rate that one bank charges another for a short-term unsecured loan. It is currently used as a reference rate for pricing bonds, debentures, forward rate agreements, interest rate swaps, and floating rate notes in India.

Mumbai Interbank Outright Rate includes overnight rate, 14-day, 1-month, and 3-month term rates.

The Reserve Bank of India regulates this financial benchmark and sets the rate computation process.

Currently, Financial Benchmark India (Private) Limited administers the overnight Mumbai Interbank Outright Rate known as 'FBIL – Overnight MIBOR' along with other financial benchmarks in India.

The FBIL Overnight MIBOR is calculated from the trade-weighted average interbank call money transactions on the Negotiated Dealing System - Call platform by the Clearing Corporation of India Ltd during the first hour of trading, 9 AM to 10 AM.

FBIL Overnight MIBOR is calculated using T+0 settlement deals and a minimum of 10 trades with a minimum transacted value of ₹5 billion.

If the above criteria are not met in time, the rate computation is prolonged twice by 30 minutes. If neither threshold is met, the FBIL will distribute the previous working days' worth.

The FBIL Term MIBOR is derived based on the polled data from select banks and primary dealers.

The pricing of overnight indexed swaps used for hedging interest rate risk uses the financial benchmark based on Mumbai Interbank Outright Rate known as FBIL MIBOR OIS.

MIBOR Transitions & Trends

MIBOR methodology, underlying rates, calculating agency, and regulator have changed over time. It has moved away from being a polled rate determined by a select group of the market to a universal market-based rate.

After repeated global revelations of market manipulation in the London Interbank Overnight Rate, the Reserve Bank of India formed a committee to evaluate the computation and dissemination of significant financial benchmarks in India.

The Fixed Income Money Market and Derivatives Association, Foreign Exchange Dealers Association of India, and Indian Bank Association formed Financial Benchmarks India (Private) Ltd in 2014 to gradually administer benchmarks based on the committee's recommendations in a phased manner.

As per the latest data published by the FBIL, the Overnight MIBOR has witnessed a rise in the number of transactions and volume since the beginning of the financial year 2022-23 and the rates have fluctuated between 3.70%-6.75% till January 2023.

Source: FBIL

Need for MIBOR

Financial benchmarks such as MIBOR are key indicators for price integrity, liquidity, price transparency, and reducing information asymmetry, in the financial markets.

It is used for pricing a retail loan to determine the payoff in a complex derivative product. The use of benchmarks in valuation helps ascertain the fair value of a financial instrument and incentives in trading in the instruments.

The Mumbai Interbank Outright Rate is also a key determinant for the further development of derivative instruments in corporate bond markets.

It also helps the Reserve Bank of India to signal its monetary policy stance on interest rates. It facilitates the central bank's monetary policy transmission.

A rise in the MIBOR rate indicates tight liquidity conditions, while a fall in the rate indicates surplus liquidity.

Sources: Reserve Bank of India, CCIL, FBIL