MIBOR and MIBID

The Mumbai Inter-Bank Offered Rate (MIBOR) and the Mumbai Inter-Bank Bid Rate (MIBID) are benchmark interest rates that reflect the short-term borrowing and lending costs among banks in the Indian money market. Both rates are published by the Financial Benchmarks India Private Limited (FBIL), which assumed this role from the National Stock Exchange (NSE) in 2015. These rates are crucial indicators of liquidity conditions, monetary policy transmission, and overall financial market stability in India.

Concept and Meaning

• MIBOR (Mumbai Inter-Bank Offered Rate):MIBOR represents the rate at which banks are willing to lend funds to other banks in the Indian interbank money market on an unsecured basis for short durations (usually overnight). It serves as the benchmark lending rate among banks.
• MIBID (Mumbai Inter-Bank Bid Rate):MIBID, conversely, represents the rate at which banks are willing to borrow funds from other banks in the interbank market. It serves as the benchmark borrowing rate among banks.

Together, MIBOR and MIBID indicate the range of interest rates prevailing in the call money market — MIBID being the lower bound (borrowing rate) and MIBOR the upper bound (lending rate).

Background and Introduction

The National Stock Exchange (NSE) introduced the MIBOR and MIBID benchmarks on 15 June 1998, modelled after international counterparts such as the London Interbank Offered Rate (LIBOR). The main objective was to create transparent and standardised reference rates for pricing short-term money market instruments, including interbank loans, commercial papers, and floating-rate debt instruments.
Initially, these rates were computed using data from the overnight call money market, where banks lend to each other to manage short-term liquidity. Over time, MIBOR and MIBID were extended to other tenors such as 14-day, 1-month, and 3-month maturities, reflecting the evolving sophistication of the Indian financial market.
In July 2015, the responsibility for administering these benchmarks was transferred to Financial Benchmarks India Pvt. Ltd. (FBIL) — an entity promoted by the Reserve Bank of India (RBI), Fixed Income Money Market and Derivatives Association of India (FIMMDA), and Foreign Exchange Dealers’ Association of India (FEDAI).

Methodology of Computation

The MIBOR and MIBID rates are calculated based on actual transaction data from the Indian interbank market. The methodology is designed to ensure accuracy, transparency, and representativeness of prevailing market conditions.

1. Data Collection:
   • Transactions and quotes are obtained from a representative panel of banks and primary dealers.
   • The focus is on unsecured interbank call money transactions.
2. Filtering and Averaging:
   • Outlier rates are removed to prevent distortion.
   • A volume-weighted average rate (VWAR) is calculated to represent the typical market rate for the tenor.
3. Publication:
   • Overnight MIBOR and MIBID rates are published every working day around 10:45 a.m. by FBIL.
   • The rates are expressed as annualised percentages.

This standardised process ensures consistency with international best practices in benchmark rate calculation.

Tenor Variants

The FBIL currently publishes MIBOR and MIBID for multiple maturities to capture short-term liquidity across time horizons:

• Overnight MIBOR/MIBID (most commonly used)
• 14-day MIBOR/MIBID
• 1-month MIBOR/MIBID
• 3-month MIBOR/MIBID

Of these, the overnight MIBOR is the most widely referenced benchmark for interbank transactions, derivatives, and short-term instruments.

Difference between MIBOR and MIBID

The spread between MIBOR and MIBID—known as the bid–offer spread—reflects liquidity conditions in the interbank market. A narrow spread indicates stable liquidity, while a wider spread signals volatility or tight liquidity.

Applications and Importance

MIBOR and MIBID play a vital role in India’s financial markets and monetary operations. Their applications include:

1. Benchmark for Money Market Instruments:
   • Used to price short-term instruments such as commercial papers, certificates of deposit, and interbank loans.
2. Reference for Floating Rate Debt:
   • Corporate bonds, debentures, and loans often use MIBOR as a reference rate to determine periodic interest resets.
3. Derivatives Market:
   • MIBOR serves as the benchmark rate for interest rate swaps, forward rate agreements (FRAs), and futures contracts in India.
4. Monetary Policy Transmission Indicator:
   • Movements in MIBOR closely reflect changes in liquidity and policy stance of the RBI, thereby serving as a key indicator of short-term interest rate trends.
5. Risk Management Tool:
   • Financial institutions use MIBOR-linked instruments to hedge interest rate exposure and manage liquidity risks.
6. Market Transparency:
   • Publication of daily MIBOR and MIBID promotes price discovery and transparency in the interbank market.

Relationship with RBI Policy Rates

MIBOR and MIBID are market-determined but tend to move in alignment with the Reserve Bank of India’s policy rates, such as the repo rate and reverse repo rate.

• When the RBI reduces the repo rate, liquidity increases, and MIBOR typically declines.
• Conversely, a tightening of monetary policy leads to higher MIBOR and MIBID levels.

Hence, these rates serve as a practical reflection of short-term liquidity and the effectiveness of monetary policy transmission in the financial system.

Example Illustration

Suppose on a given day:

• MIBID = 6.50%
• MIBOR = 6.75%

The 0.25% spread (25 basis points) represents the difference between the rates at which banks are willing to borrow and lend overnight. A borrower (bank) needing funds for one day may obtain them at 6.75%, while a lender earns 6.50%, with the spread reflecting transaction costs and liquidity premium.

Advantages of MIBOR and MIBID

• Transparency: Derived from actual market data rather than subjective quotes.
• Market Efficiency: Provides a reliable benchmark for short-term funding costs.
• Standardisation: Facilitates uniform pricing across various financial instruments.
• Policy Indicator: Reflects real-time liquidity and monetary conditions.

Limitations and Challenges

• Limited Market Depth: The unsecured interbank market in India is relatively small compared to developed economies, affecting rate representativeness.
• Volatility: Overnight MIBOR can fluctuate significantly during liquidity shortages or regulatory interventions.
• Concentration Risk: A few large banks dominate the interbank market, potentially influencing benchmark outcomes.
• Transition Concerns: Global benchmark reforms (like LIBOR discontinuation) have raised the need for alternative risk-free reference rates (RFRs).

Recent Developments

Following global benchmark reforms, the RBI and FBIL have been working to strengthen benchmark governance in India. In line with international practices, FBIL has introduced additional benchmarks like the FBIL Overnight Mumbai Interbank Outright Rate (F-OMIOR) and the Modified MIBOR, aligning them with risk-free overnight indexed rates (OIS) for enhanced robustness and compliance.