What is the Mumbai Interbank Offered Rate (MIBOR)?
The Mumbai Interbank Offer Rate (MIBOR) serves as India’s pivotal reference for short-term borrowing between major banks. MIBOR’s introduction was a significant step in aligning India’s financial transactions and policies with its developmental trajectory, particularly influencing the debt market. Utilized alongside the Mumbai interbank bid rate (MIBID) and Forward Rate (MIFOR), MIBOR assists the Reserve Bank of India in shaping short-term monetary policy.
Key Insights and Importance
- The Mumbai Interbank Overnight Rate (MIBOR) defines the rate at which Indian commercial banks lend to each other overnight.
- It is derived from inputs by a panel comprising 30 banks and primary dealers.
- Launched in 1998, MIBOR shares a conceptual framework with the London InterBank Overnight Rate (LIBOR).
Grasping the Concept of MIBOR
In the financial ecosystem, banks engage in borrowing and lending within the interbank market to uphold mandatory liquidity levels and satisfy reserve mandates federated by regulatory authorities. These interbank rates are permissible exclusively to large, highly solvent institutions. The National Stock Exchange of India (NSEIL) calculates MIBOR daily using a weighted average of lending rates furnished by major Indian banks to top-tier borrowers. Essentially, this serves as the standard rate when banks seek short-term loans from each other.
MIBOR’s foundational principles are remarkably parallel to the London InterBank Overnight Rate (LIBOR). In India, it finds application in instruments like forward contracts and debentures with floating rates. With increasing adoption, MIBOR is poised to gain more prominence in shaping financial dynamics.
Tracing the Origins of MIBOR
MIBOR’s journey began on June 15, 1998, initiated by the Committee for the Development of the Debt Market as an overnight benchmark rate. Following its inception, the 14-day MIBOR debuted on November 10, 1998, and the market saw the rollout of one-month and three-month MIBORs by December 1 of the same year. From then on, MIBOR has persistently functioned as a benchmark, underscoring most money market transactions within India.
Distinguishing MIBOR from MIBID
The Mumbai Interbank Bid Rate (MIBID) typifies the interest rate banks proffer to attract deposits from other banks. Typically, MIBID stands lower than MIBOR, which captures the offered rate banks would charge each other for loans. This variance exists as banks endeavor to pay minimal interest on deposits received while charging higher rates on loans disbursed, thereby ensuring profit through an advantageous spread between borrowed and lent rates. Collectively, MIBID and MIBOR encapsulate the bid-offer spread underpinning Indian overnight lending archetypes.
Related Terms: Interbank Market, LIBOR, Money Market, Monetary Policy, Overnight Rate.
