Mumbai Interbank Offered Rate (MIBOR)

Definition

The Mumbai Interbank Offered Rate (MIBOR) is the interest rate that Indian banks use when lending to each other. It is determined daily by the National Stock Exchange of India (NSEIL) based on the averaged interest rates at which banks offer to lend unsecured funds to other banks in the Indian interbank market. This rate serves as a benchmark for short-term interest rates in the Indian economy.

Phonetic

The phonetic pronunciation of “Mumbai Interbank Offered Rate (MIBOR)” is:Mumbai – mʊmˈbaɪ Interbank – ˌɪn.tərˈbæŋkOffered – ˈɔː.fərdRate – reɪtMIBOR – mɪ’bor

Key Takeaways

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1. The Mumbai Interbank Offered Rate (MIBOR) is the interest rate at which banks borrow and lend to each other in the wholesale money market in Mumbai.
2. MIBOR is determined daily by the National Stock Exchange of India (NSEIL) and is used as a reference rate for majority of deals in derivatives, treasury, and money markets in India.
3. MIBOR represents the health of India’s money market and the level of liquidity within it. It is used as an indicator of the short-term interest rate in the Indian economy.

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Importance

The Mumbai Interbank Offered Rate (MIBOR) is important as it serves as a benchmark for interest rates that are used in various financial instruments such as forward rate agreements, interest rate swaps, and floating rate notes in India. It reflects the short-term lending rates within the Indian banking system, thus offering a key insight into the functioning and liquidity of the Indian money markets. It is also used by banks to manage risk and maintain liquidity. Hence, MIBOR plays a crucial role in setting a transparent and reliable reference rate for financial transactions across multiple sectors of the Indian economy.

Explanation

The Mumbai Interbank Offered Rate (MIBOR) serves an important purpose in the Indian financial system, acting as a standard for interest rates that are fundamental to various financial transactions. Established by the National Stock Exchange of India, MIBOR is a benchmark rate that represents the interest charged by one bank to another for lending purposes in the Mumbai Interbank Market. Many financial instruments’ pricing and interest rate decisions rely heavily on MIBOR, including derivatives such as Interest Rate Swaps (IRS) and Forward Rate Agreements (FRA), thereby highlighting its importance as a practical and reference tool in financial operations.These interest rates are used by banks, businesses, and investors for calculating borrowing costs and deciding the rates to charge on particular products or services, making MIBOR an imperative tool in financial planning, lending practices, and the execution of fiscal strategies. Additionally, the Reserve Bank of India (RBI) frequently uses MIBOR to evaluate and analyze current market conditions, trends, and monetary policies, making it a key instrument in the country’s financial infrastructure. As it navigates through local and global economic events, MIBOR continues to play a pivotal role in Indian banking and financial sectors.

Examples

1. Housing Loans: In India, many banks and financial institutions use MIBOR as a benchmark rate for their adjustable-rate home loans. For example, if the MIBOR is at 6%, a bank may offer home loans at a rate equal to the MIBOR plus a specified percentage. Changes in MIBOR are regularly tracked by potential homebuyers as well as current homeowners whose loan interest rates are tied to this benchmark.2. Corporate Loans: Corporations often borrow funds for business expansion, working capital needs, or other expenses, and these loans’ interest rates can be linked to the MIBOR. It directly impacts their borrowing costs. For instance, a company might have taken a loan where the interest rate is defined as the MIBOR + 2%. If the MIBOR rises, their loan’s cost increases, which could affect their balance sheet, and vice versa.3. Interest Rate Swaps: Financial institutions often engage in interest rate swaps to manage risk, where they agree to exchange one stream of interest payments for another. A common example of this in India would be swapping a fixed interest rate for one tied to the MIBOR. For instance, Bank A and Bank B could enter into a one-year swap contract where Bank A pays Bank B the MIBOR rate, and Bank B pays Bank A a fixed interest rate. Changes in the MIBOR would impact the payments exchanged under this contract.

Frequently Asked Questions(FAQ)

Related Finance Terms

• Interbank Market
• Foreign Exchange (Forex)
• Short-term Interest Rate
• London Interbank Offered Rate (LIBOR)
• Financial Benchmark

Sources for More Information

• MoneyControl
• Investopedia
• Reserve Bank of India
• Business Standard