India to launch new overnight benchmark rate

In the wake of the UK’s LIBOR manipulation scandal, The Fixed Income Money Market and Derivatives Association of India (FIMMDA), the Foreign Exchange Dealers’ Association of India (FEDAI) and the Indian Banks’ Association have formed a new firm to fix the Mumbai Inter-Bank Offer Rate (MIBOR), in line with a Reserve Bank of India (RBI) panel recommendations.

MIBOR is the rate at which banks lend and borrow overnight money to each other. It is currently calculated everyday by the National Stock Exchange as a weighted average of inter-bank offer (lending) rates of a group of 30 banks.

The new rate calculation will set the overnight interest rate benchmark based on traded levels instead of contributions from market participants and will be administered by the board of Financial Benchmarks India Private Ltd (FBIL).

The new benchmark will be based on trade-weighted call money transactions conducted on Clearing Corporation of India’s trading platform between 0900-1000 IST, the board said. That will mark a contrast to the current MIBOR, which is compiled by polling market participants and is used to benchmark overnight pricing of call money rate in India.

“(This) is a first step in the process of taking over responsibility of benchmark setting over a period of time. Based on a detailed analysis of overnight call money market data, the board has decided to adopt a benchmark based on trade weighted inter-bank call money transactions on the Clearing Corp. of India Ltd’s NDS-Call platform between 9am and 10am. The new benchmark will be known as the FBIL Overnight Mumbai Interbank Outright Rate (FBIL-Overnight MIBOR),” the firm said in an emailed release.

The new rate, which will be calculated from the 22nd of July this year, has been created after an RBI committee led by executive director P. Vijaya Bhaskar suggested that Indian money markets should move their benchmark rates to transaction-based rather than a poll-based system to ensure that benchmark interest rates are not manipulated. RBI had accepted the committee’s recommendations in 2014 and directed FIMMDA, FEDAI and IBA to take necessary action. “In order to overcome the possible conflicts of interest in the benchmark setting process arising out of the current governance structure of FIMMDA and FEDAI, an independent body either separately or jointly may be formed,” RBI had said.

The current FIMMDA-NSE MIBOR polled overnight benchmark will cease to be published from the effective date of the new benchmark. All transactions outstanding on the effective date referenced to the current benchmark will automatically switch to the new reference rate.

Following the transition of the MIBOR rate in July, FBIL will take over administration of forex benchmarks and other rupee interest-rate benchmarks over time, after a careful examination of the methodology and use within financial markets, and in consultation with contributors and users.

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