What Is MIBOR - The Mumbai Interbank Offered Rate?
MIBOR stands for Mumbai Interbank Offered Rate (MIBOR) it is one iteration of India’s interbank rate.
A bank charges this rate of interest on a short-term loan to another bank.
As the development of financial markets continues in India, it felt it needed a reference rate for its debt market, leading to the development and introduction of the MIBOR.
The central bank of India uses MIBOR in conjunction with the Mumbai interbank bid and forward rates (MIBID and MIFOR) to set short-term monetary policy.
Understanding the Mumbai Interbank Offered Rate
On the interbank market, the banks borrow and lend money to one another for maintaining appropriate, legal liquidity levels, and to reach up to the reserve requirements placed on them by regulators.
Only the largest and most creditworthy financial institutions can avail these interbank rates.
Every day the National Stock Exchange of India (NSEIL) calculates MIBOR as a weighted average of lending rates of a group of major banks throughout India, on funds lent to first-class borrowers.
In the Indian interbank market, this is the interest rate at which banks can borrow funds from other banks.
The London InterBank Overnight Rate (LIBOR) is the inspiration behind the modeling of the Mumbai Interbank Offer Rate (MIBOR).
Currently, the rate is used for forwarding contracts and floating-rate debentures. Over time and with regular usage, MIBOR may become more prominent.
The History of MIBOR
MIBOR was launched as an overnight rate by the Committee Development of the Debt Market on June 15, 1998. On November 10, 1998, the NSEIL launched the 14-day MIBOR, and on December 1, 1998, the one-month and three-month MIBORs were launched.
Since the launch, in India for the majority of money market deals made, MIBOR rates have been used as benchmark rates.
The Difference between MIBOR and MIBID
MIBID, the Mumbai Interbank Bid Rate (MIBID) is the interest rate that one participating bank pays to another bank to attract the deposit of funds in the Indian interbank market.
The MIBID rates the weighted average of all interest the participating banks offer on deposits on a particular day.
MIBOR is the acronym for Mumbai Interbank Offering Rate, the yardstick of the Indian money market.
In the interbank market, it is the rate at which banks borrow unsecured funds from one another.
The MIBOR is higher than MIBID rates because – after taking loans the banks will try to pay less interest and while offering loans they will try to get more interest.
The MIBID and MIBOR together add up to a bid-offer spread for Indian overnight lending rates.
MIBOR is the interest rate that the lender would like to charge while lending or giving loans while MIBID is the interest rate that the borrower is willing to pay.
The offer and bid are both part of loan obtaining activities. MIBOR is the interest rate that a bank is willing to charge from a borrower in the Mumbai interbank money market which is spread across India.
MIBOR – lender offer at this rate. The lender wants a higher rate and with
MIBID Borrower bid at this rate. The borrower wants the loans at a lower rate.
As Everybody would like the money to generate interest they would like to generate interest due to which banks want to lend the money.
Depending on the bank’s credit rating the borrowing rates vary. Hence banks with good credit ratings borrow at lower interest rates and lend to other banks at higher rates and make money from the difference.
Conclusion
The overnight lending offered rate for Indian commercial banks is Mumbai InterBank Overnight Rate or MIBOR.
Depending on the input from a panel of 30 banks and primary dealers the MIBOR is calculated.
MIBOR was first established in 1998 and coined following the more famous London InterBank Overnight Rate (LIBOR).
The majority of deals struck for Interest Rate Swaps, Forward Rate Agreements, Floating Rate Debentures, and Term Deposits use the MIBOR rate as a benchmark.
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