MIBOR

  • September 22, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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MIBOR 

Subject: Economy

Context:

RBI announces Variable Rate Repo (VRR) auction of one-day tenor under Liquidity Adjustment Facility to inject ₹50,000-crore liquidity to help the banking system tide over the liquidity deficit and also soften call money rates.

Details:

Liquidity in the banking system went into deficit mode after remaining in surplus mode for almost 40 months.

Impact of liquidity deficit:

  • Interbank call money rate rose above the repo rate:
    • Given the liquidity shortage short-term lending rates would increase at a faster pace than long term lending rates.

Concept:

Call money rate

  • It is the rate at which short term funds are borrowed and lent in the money market.
  •  The duration of the call money loan is 1 day.
  • Banks resort to these types of loans to fill the asset liability mismatch, comply with the statutory CRR and SLR requirements and to meet the sudden demand of funds.
  • RBI, banks, primary dealers etc are the participants of the call money market.
  • Demand and supply of liquidity affect the call money rate.
    • A tight liquidity condition leads to a rise in call money rate and vice versa.
  • It represents the unsecured segment of the overnight money market and is best reflective of systemic liquidity mismatches.
The money market primarily facilitates lending and borrowing of funds between banks and entities like Primary Dealers (PDs).

Banks and PDs borrow and lend overnight or for the short period to meet their short term mismatches in fund positions. This borrowing and lending is on an unsecured basis.

  • ‘Call Money’ is the borrowing or lending of funds for 1day.
  • Where money is borrowed or lent for a period between 2 days and 14 days it is known as ‘Notice Money’.
  • ‘Term Money’ refers to borrowing/lending of funds for a period exceeding 14 days.

The Mumbai Interbank Overnight Rate–MIBOR:

  • Based on the recommendation of the Committee for the Development of Debt Market, the National Stock Exchange (NSE) launched the Mumbai Interbank Offer Rate (MIBOR) and Mumbai Interbank Bid Rate (MIBID) in June, 1998.
  • It is the rate at which banks borrow unsecured funds from one another in the interbank market.
  • The rate is computed by polling a representative panel of 30 banks and primary dealers and summarizing the quotes that they provided.

The FBIL overnight MIBOR 

  • Financial Benchmarks India Private Ltd (FBIL), from July 22nd, 2015, has taken over the administration of the benchmark for the overnight interbank rate to be based on the actual traded rate, thereby, replacing the existing ‘FIMMDA-NSE Overnight MIBID-MIBOR’ by ‘FBIL Overnight MIBOR’.
    • It  is an entity formed by FIMMDA, Foreign Exchange Dealers Association of India (FEDAI) and Indian Banks Association (IBA).
  • The benchmark rate is calculated on the basis of the actual call money transactions data obtained from the NDS-call platform of Clearing Corporation of India Ltd (CCIL). The CCIL acts as the Calculating Agent.
  • It is based on trade-weighted interbank call money transactions. 
    • Thus, the reference rate is based on the actual traded rates as opposed to polled rates, which are used to determine the FIMMDA NSE MIBOR/MIBID rates.
‘VRR Auction’ stands for Variable rate repo auction. Repo is the rate at which RBI lends short term loans to Banks. A part of it is done at a fixed rate and some of it is a variable rate.
economy MIBOR