The wholesale debt market segment of the National Stock Exchange (NSE), along with banks, is planning to evolve a term reference rate for the Indian money market, at the behest of the Reserve Bank of India (RBI).
The rate will also take into account the interest rate differential between the rupee and dollar, which will give it a comprehensive spread. This will not only allow for pricing of rupee debt instruments but also long term forward rates for the dollar.
The rate will compare with the London Inter Bank Offer Rate (Libor) as it will offers reference rates for various maturities up to 12 months at least, bankers said.
More From This Section
As the term market is still undeveloped, the NSE will first evolve a comprehensive yield curve for government securities which will include intrapolated yields for inactive maturities also. "This will form the basis for the term money reference rate curve," said a member of the NSE's working group which also includes banks, financial institutions, and primary dealers.
The RBI permits term market trade, but the segment is fairly inactive with only stray deals taking place, market players said. They said the market was highly illiquid because of insufficient investment opportunities.
The gilts market is fairly thin particularly for long maturities. The few tradeable options include Government of India treasury bills of 14, 91 and 364 days maturities, and commercial paper offering from corporates with maturities of 30 to 90 days. Bankers said very structure of the Indian banking system offered scope for the market to develop. On the one hand there are rupee-surplus public sector banks seeking investment opportunities, and on the other there are foreign banks with small deposit bases which largely depended on the money market to raise funds.
The reference rate will speed up the development of the fixed income market in India. It will help price debt market instruments such as inter-bank deposits of various maturities, bonds, and rupee derivatives.
It will aid the emergence of a forward dollar premium curve based on interest rate differentials between the dollar and the rupee across maturities.
At present, two organisations offer an overnight money market reference rate.
The NSE offers a daily overnight reference bid and offer rate which is a simple average rate based on two-way quotes offered by 12 to 25 banks. The NSE plans to publish this rate more frequently.
Reuters India Private Limited offers a Mumbai interbank overnight rate (Mior), a simple average rate, and a Mumbai interbank offer rate (Mibor), a weighted average rate which has been increasingly used as a benchmark rate for pricing of several corporate bond issues.