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In recent interactions with bankers, the central bank has proposed to shift fixing of Mibor taking traded benchmark rates.
The Mibor is currently a polled benchmark. The rate is arrived at by a poll of 30 banks, which is conducted by the National Stock Exchange (NSE) every morning. The rate is the average of all the quotes given by the banks, though the outliers are ignored while arriving at the average. While Mibor is not as widely used as Libor, the rate is taken as reference in the interest rate swap market.
“Though it was not found that the Mibor was very different from traded rates, as a proactive measure, the central bank is thinking of making the rate more transparent,” said a banker, who was present in the discussion with the central bank on this issue.
The issue was also discussed at a seminar organised by the Fixed Income Money Market and Derivatives Association of India (Fimmda) and the Primary Dealers Association of India in the first week of February in Sri Lankan capital of Colombo.
“RBI should probably take up a role in fixing the Mibor so that a Libor fixing scandal like situation can be avoided with the Mibor,” said a treasury official, who was present at the conference. The Libor scam broke out after bank treasury officials were found rigging the rate for profit motive. In June last year, Barclays admitted the misconduct, that some of its derivatives traders were found to have attempted to rig this key rate, and was fined 290 million pound. The scandal forced both Barclays chief executive Bob Diamond and chairman Marcus Agius to resign.
The Mibor is currently used for majority of deals struck for interest rate swaps, forward rate agreements, floating rate debentures and term deposits. However, its application is very meagre compared with Libor, which is used as a global benchmark for interest rates. It is used as the base rate for deciding the interest rates for loans, savings and mortgages. At the same time, it is also used as a base rate for many financial products, which includes futures, options and swaps.
“Mibor is used only for inter-bank borrowing and lending. Currently, it is a polled rate and not a dealt rate. The actual dealt rate or the polled rate is not much different,” said a treasury official, who attended the meeting in Colombo.
Some of the treasury officials, however, said the polling method should be continued rather than opting for a traded benchmark. “My view is that we should stick to the current practice of polled benchmark. What we need is to have a more credible polling process,” said another treasury official.
