The Mumbai Inter Bank Offer Rate (MIBOR) is a benchmark interest rate that is used by banks in India for short-term lending among themselves. The rate is fixed daily by the National Stock Exchange of India (NSE), based on the average rate at which a group of banks in Mumbai is willing to lend to each other. In this blog, we will explore how the MIBOR is fixed and the factors that affect it, using real-life examples.
What is MIBOR and why is it important?
MIBOR is an overnight interest rate, which is used as a benchmark for short-term lending in the Indian interbank market. The rate is used to determine the cost of borrowing and lending between banks, which affects the availability of credit in the economy. MIBOR is also used as a benchmark for other financial instruments such as floating rate bonds, commercial paper, and certificates of deposit.
How is MIBOR fixed?
MIBOR is fixed daily by the National Stock Exchange of India (NSE), based on the average rate at which a group of banks in Mumbai is willing to lend to each other. The rate is fixed after taking into account the quotes received from a panel of selected banks, known as the MIBOR contributor panel. The contributor panel includes banks such as State Bank of India, HDFC Bank, ICICI Bank, and others.
The MIBOR contributor panel submits their quotes by 10:30 am each day, indicating the rate at which they are willing to lend to other banks for overnight funds. The quotes are ranked in descending order, and the rates quoted by the top 10 banks are averaged to arrive at the MIBOR for the day. The MIBOR is then published by the NSE at around 11:45 am each day.
Factors that affect MIBOR:
The MIBOR is influenced by various factors, including the demand and supply of funds in the interbank market, the prevailing economic conditions, and the monetary policy stance of the Reserve Bank of India (RBI). Some of the factors that affect MIBOR are:
- Demand and supply of funds: The demand and supply of funds in the interbank market influence the MIBOR. If the demand for funds is high, banks may be willing to lend at a higher rate, leading to an increase in MIBOR. Conversely, if the supply of funds is high, banks may be willing to lend at a lower rate, leading to a decrease in MIBOR.
- Economic conditions: Economic conditions such as inflation, growth rate, and fiscal deficits can also affect the MIBOR. For instance, if inflation is high, the RBI may adopt a tight monetary policy stance, leading to an increase in MIBOR.
- Monetary policy stance: The monetary policy stance of the RBI also plays a critical role in determining the MIBOR. The RBI may raise or lower the repo rate, which affects the cost of funds for banks, leading to an increase or decrease in MIBOR.
The process of determining MIBOR involves the following steps:
- Submission of quotes: Member banks submit their lending and borrowing rates to the FBIL for different maturities. The quotes are submitted at a specific time each day.
- Calculation of the trimmed average: The FBIL removes the highest and lowest quotes for each maturity and calculates the trimmed average of the remaining quotes. This ensures that extreme values do not skew the calculation.
- Determination of MIBOR: The trimmed average is then published as the MIBOR for that particular maturity.
Real-life examples:
In recent years, the MIBOR has been affected by various events and factors. One of the notable examples is the impact of demonetization in 2016. After demonetization, banks were flooded with deposits, leading to a surge in liquidity in the interbank market. This resulted in a decrease in MIBOR, which fell to a historic low of 5.39% in December 2016.
Another example is the impact of the COVID-19 pandemic in 2020. As a result of the COVID-19 pandemic, MIBOR rose to a high of 5.27% in March 2020, which was the highest level seen in more than two years. The increase was due to a combination of factors, including the liquidity crunch caused by the pandemic and the Reserve Bank of India’s measures to maintain financial stability in the face of the crisis.
To address the liquidity crunch and stabilize the financial system, the Reserve Bank of India implemented several measures, including reducing the repo rate (the rate at which banks borrow funds from the central bank) and providing liquidity support to banks through various channels. These measures helped ease the tight credit conditions and bring down MIBOR to more normal levels.
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