Financial benchmarks are standard rates primarily used for pricing, valuation and settlement purposes in financial markets and contracts. These rates like interest rate or foreign exchange rate are followed by several institutions and countries in financial transactions. For example, the LIBOR or London Inter Bank Offer Rate is the standard interest rate that some of the world’s leading banks charge themselves when taking and giving loans in European markets. The LIBOR is relevant for financial markets in different countries and across different currencies including the Pound Sterling, US Dollar, Japanese Yen etc. It is the world’s most widely-used benchmark for short-term interest rates -say upto one year.
The relevance of LIBOR is not just confined to those who takes such short-term loans. For example, if an Indian company is borrowing from the European market (bank), the interest rate it has to pay is usually estimated based upon the LIBOR rate.
Here, the Indian company has to pay an interest rate of LIBOR rate plus the coverage for the risk that the European lender has to bear.
Benchmark interest rates in India: MIBOR and MIBID
In India, there are several such benchmarks for interest rate, foreign exchange rate etc. The MIBOR (Mumbai Interbank Offer Rate) and MIBID (Mumbai Interbank Bid Rate) are the two interest rate benchmarks in the Indian Interbank market where most of the transactions are done in Mumbai. Following are some of the snapshot points about these two rates.
- MIBOR and MIBID are interest rate benchmarks
- Both are benchmark interest rate prevailing in Mumbai Inter-Bank Money Market.
- MIBOR is the Indian equivalent of LIBOR
- MIBOR is loan interest rate; it is the rate at which a lender would like to charge
- MIBID is the interest rate that a borrower like to pay while getting a loan.
To understand the difference between MIBOR and MIBID, keep it in mind that MIBOR is the offer rate. Or it is the rate at which the lender offer loans.
On the other hand, MIBID is the bid rate or the rate at which a borrower seeks a loan.
MIBOR is the rate offered/asked by lenders whereas MIBID is the bid rate quoted by borrowers. Both offer and bid are part of loan obtaining activities.
Mumbai Inter-Bank Offer Rate (MIBOR)
MIBOR is the interest rate that a bank is willing to charge from a borrower in the Mumbai Interbank money market (which is spread all across India).Effectively MIBOR is the average interest rate charged by banks from other banks (usually for loans on very short term like one or one month etc.).
There are different short term MIBOR loan schemes extending from fixed overnight (One day) to 3-month funds. The interest rates are published every day. This rate is given to first class borrowers and lending institutions, and is based on an average of lending rates offered by major banks throughout India.
MIBOR is calculated on the basis of data collected from the panel of 30 banks and primary dealers.
Relevance of MIBOR
The significance of MIBOR as a benchmark interest rate is that it can be used as a standard by other lenders in various financial markets while fixing the interest rate on loans. For example, a bank can fix its lending rate for a corporate based on MIBOR plus an additional rate depending upon the riskiness of the borrower. This is the significance of MIBOR. But MIBOR is yet to be developed as a financial benchmark for lending.
What is MIBID rate?
MIBID is the rate at which banks would like to borrow/take loans from other banks. Hence, MIBID is quoted by borrower banks to obtain funds. In this context, MIBID rate would be lower than the MIBOR rate (as there is difference between lending rate and deposit rate).
What is the use of MIBOR and MIBID?
The function of both MIBOR and MIBID is to act as financial benchmarks. Here, the MIBID/MIBOR rate is used as bench mark rate for majority of deals struck in the derivative market. The rate/value of Interest Rate Swaps (IRS), Forward Rate Agreements (FRA), Floating Rate Debentures and Long Term Deposits are determined on the basis of MIBOR/MIBID.