The government will adopt from July 22 a new method to set the overnight interest rate benchmark that will be based on traded levels instead of contributions from market participants. The method, earlier announced by Raghuram Rajan-led RBI, will replace the current Mumbai Inter-Bank Offer Rate (MIBOR), a press release stated on Monday.
The new methodology stipulates that the board of Financial Benchmarks Private Ltd (FBIL), an association of Fixed Income Money Market and Derivatives Association of India (FIMMDA), Foreign Exchange Dealers’ Association of India (FEDAI) and Indian Banks’ Association (IBA) shall administer overnight inter-bank MIBOR benchmark rate.
MIBOR, which is the rate at which banks lend and borrow overnight money to each other, has been published by National Stock Exchange till now. It is one of the four money markets in the world having interbank offered rate fixings in US dollar.
Following the LIBOR (London interbank overnight rate) scandal in June 2012, the Indian central bank had set up a panel to mitigate the risks from fixing of overnight rate.
Under the new rule, the rate will be decided on the basis of a benchmark based on trade weighted inter-bank call money transactions on the Clearing Corporation of India Ltd’s (CCIL) NDS-Call platform between 9 AM and 10 AM. The new benchmark will be known as the FBIL Overnight Mumbai Interbank Outright Rate (FBIL-Overnight MIBOR). The panel’s report stated that a minimum of 10 trades with a total traded value of Rs 500 crore in the NDS-Call segment will be considered as the minimum threshold limit (both) for estimation of the volume weighted average rate.
The FBIL also proposed to take over administration of forex benchmarks and other Indian rupee interest rate benchmarks over a period of time after careful examination of the methodology and utility to the financial markets in consultation with stakeholders.