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What Was the Mumbai Interbank Offer Rate (MIBOR)?
Let me explain what the Mumbai Interbank Offer Rate, or MIBOR, really was. It was the rate at which banks in India aimed to charge other banks for lending money, and it paired with the Mumbai Interbank Bid rate, or MIBID, which was what banks wanted to pay to borrow. Think of MIBOR as India's take on the London Interbank Offered Rate, fixed for loans from overnight up to three months.
Key Takeaways on MIBOR
You should know that MIBOR, the Mumbai InterBank Overnight Rate, represented the overnight lending rate for Indian commercial banks. It started in 1998, patterned after the global LIBOR. Initially, it drew from inputs by a panel of 30 banks and primary dealers. But in 2015, it got replaced by the FBIL-Overnight MIBOR to address some flaws.
Understanding the Mumbai Interbank Offer Rate (MIBOR)
Banks lend and borrow from each other in the interbank market to keep their liquidity in check and meet regulatory reserve requirements. These rates are reserved for the biggest, most reliable institutions. MIBOR specifically was the asking rate for loans from overnight to three months, calculated daily by the National Stock Exchange of India as a weighted average of proposed lending rates. We gathered this by polling 30 major Indian banks on rates they'd offer to their top borrowers.
History of the MIBOR
MIBOR launched on June 15, 1998, through the Indian National Stock Exchange's Committee for the Development of the Debt Market, serving as a benchmark for the call money market. Soon after, the NSE introduced the 14-day MIBOR on November 10, 1998, and the one-month and three-month versions on December 1, 1998. From 1998 to 2015, these rates benchmarked most money market deals in India.
By 2015, concerns arose that polled banks could manipulate MIBOR by inflating estimates for profit. That's why we now have the Financial Benchmarks India Pvt Ltd (FBIL) Overnight Mumbai Interbank Outright Rate, or FBIL-Overnight MIBOR, based on real transaction rates with max and min values for transparency.
MIBOR vs. MIBID
Originally, MIBOR was what banks wanted to earn on overnight loans, but manipulation risks led to its 2015 replacement by FBIL-Overnight MIBOR, which uses verifiable rates to ensure honesty. MIBID, its counterpart, was the rate banks wanted to pay for loans, always lower than MIBOR, forming a bid-ask spread. MIBID also ended in 2015.
Instead of polling for two rates, the new system observes actual bank transactions to create a rate range, eliminating doubts about accuracy.
What Is the Interbank Offered Rate?
Interbank offered rates are the interest charges between banks for overnight loans. They're crucial as risk-free benchmarks that underpin many other rates.
What Is the Mumbai Interbank Forward Rate?
The Mumbai Interbank Forward Offer Rate set prices for forward-rate agreements and derivatives in India until its discontinuation in 2018.
What Is the Difference Between LIBOR and MIBOR?
LIBOR came from U.K. bank submissions and influenced rates worldwide until replaced by the Secured Overnight Financing Rate (SOFR). MIBOR was India's LIBOR analog, polled from 30 Indian banks and dealers, but got updated in 2015 to FBIL-Overnight MIBOR for better reliability.
The Bottom Line
In essence, MIBOR was the overnight rate Indian banks charged each other for loans, paired with MIBID for a rate spread. Derived from bank polls that could be skewed for profit, it was replaced in 2015 by FBIL-Overnight MIBOR, which uses weighted averages of real market transactions for a more trustworthy range.
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