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What Was the Mumbai Interbank Offer Rate (MIBOR)?
The Mumbai Interbank Offer Rate (MIBOR) was the rate at which banks in India wanted to charge other banks to lend them money. It was used in conjunction with the Mumbai Interbank Bid (MIBID) rate, which was the rate banks wanted to pay to borrow money.
The MIBOR was the Indian version of the London Intrabank Offer Rate and was fixed for funds that ranged from overnight to three months.
Key Takeaway
- The Mumbai InterBank Overnight Rate, or MIBOR, was the overnight lending offered rate for Indian commercial banks.
- MIBOR was first established in 1998 and was modeled after the more widely used London InterBank Overnight Rate (LIBOR).
- Originally, MIBOR was calculated using input from a panel of 30 banks and primary dealers.
- MIBOR was replaced by the FBIL-Overnight MIBOR in 2015.
Understanding the Mumbai Interbank Offer Rate (MIBOR)
Banks borrow and lend money to one another on the interbank market to maintain appropriate legal liquidity levels and to meet reserve requirements placed on them by regulators. Interbank lending rates are made available only to the largest and most creditworthy financial institutions.
MIBOR was the asking rate for overnight to three-month loans, calculated every day by the National Stock Exchange of India (NSE) as a weighted average of proposed lending rates. Data was gathered by polling 30 major banks throughout India on the rates they intended to use to lend funds to their most trusted borrowers.
History of the MIBOR
The MIBOR was launched on June 15, 1998, by the Indian National Stock Exchange (NSE) Committee for the Development of the Debt Market as a benchmark for the call money market. The NSE launched the 14-day MIBOR on November 10, 1998, and the one-month and three-month MIBORs on December 1, 1998. Between 1998 and 2015, MIBOR rates were used as benchmark rates for the majority of money market deals made in India.
In 2015, it was decided that polled respondents could too easily manipulate MIBOR by exaggerating their rate estimates for profitability purposes. The latest version of MIBOR is the Financial Benchmarks India Pvt Ltd (FBIL) Overnight Mumbai Interbank Outright Rate (FBIL-Overnight MIBOR), which is based on actual transaction rates, and includes a maximum and minimum rate.
MIBOR vs. MIBID
Originally, MIBOR was the rate that banks wanted to be paid for overnight loans. In 2015, it was replaced by the FBIL-Overnight MIBOR due to concerns that the banks polled could easily falsify the rates they claimed they were going to charge. The new MIBOR is based on observable rates, so there is no question of whether the rate estimations are accurate or honest.
The Mumbai Interbank Bid Rate (MIBID) was the companion rate to the original MIBOR in that it was the rate at which banks wanted to pay for a loan. It was lower than the MIBOR rate, which created a bid/ask spread between the two rates. MIBID was also discontinued in 2015.
Instead of using two rates created by polling banks, the FBIL-Overnight MIBOR is a range of rates calculated by observing transactions between banks rather than asking them what rates they would charge and ask.
What Is the Interbank Offered Rate?
Interbank offered rates are interest rates charged between banks on overnight loans. These rates are important because they are considered risk-free rates many other rates are based on.
What Is the Mumbai Interbank Forward Rate?
The Mumbai Interbank Forward Offer Rate was the rate used to set prices on forward-rate agreements and derivatives in India before it was discontinued in 2018.
What Is the Difference Between LIBOR and MIBOR?
The London Intrabank Offered Rate (LIBOR) was set by submissions from a panel of banks in the U.K. and was used by several countries. LIBOR was replaced by the Secured Overnite Financing Rate (SOFR). The original Mumbai Intrabank Overnight Rate was India's version of LIBOR and was set based on polls from 30 banks and dealers in India, but it was replaced in 2015 by the FBIL-Overnight MIBOR.
The Bottom Line
The Mumbai Intrabank Offered Rate was the overnight rate banks charged each other for loans in India. It was used in conjunction with MIBID to create a rate spread for banks. Rates were derived by polling specific banks and dealers, who could influence rates based on the probability of profitability. It was replaced in 2015 by the FBIL-Overnight MIBOR, which is a rate range calculated using the weighted averages of transactions occurring in the Indian market.