Mumbai inter-bank rate for overnight transactions closely tracks call rates. Borrowers using the interest rate benchmark set in London (Libor) feel they have been taken for a ride.

Borrowers using the interest rate benchmark set in London (Libor) feel they have been taken for a ride.

But those using a similar benchmark out of Mumbai have nothing to fear. Called the FIMMDA NSE Mibor (Mumbai inter-bank offer rate), the benchmark closely mirrors the rate at which banks borrow from one another on an overnight basis.

Narrow gap

A comparison of Mibor movements with interest rates in the call money market suggests that they mostly move in tandem. What is more, the gap between the two is very small.

In the last two years, the difference between call rates and the Mibor has averaged seven basis points and shrunk to three basis points in the last six months.

Some divergence between the two is unavoidable as Mibor is determined early in the day (9-40 a.m.).

But borrowings happen throughout the day with the bulk of them concentrated in the morning, says Mr Rajat Monga, CFO & President Financial Markets, YES Bank.

Running the numbers over two years shows a 0.99 correlation coefficient between daily weighted average call rates and the Mibor rate.

But there have been instances of wider gaps between the weighted average call rates and Mibor in the past. For instance, in August 2010, the weighted average call rate was 4.4 per cent compared with 5.4 per cent Mibor rate.

Bridging the gap

When asked about such anomalies Mr Monga said, “If suddenly a bank receives an unexpected cash inflow at 2 pm. It has the option of parking it in the reverse repo window at a low rate or lending it at in the call money market”. This leads to call rates fleetingly spiking above the Mibor.

While the Mibor for overnight transactions closely tracks call rates, it tends to diverge more from rates on 1-year certificates of deposit or 3-month certificates of deposit. In the last six months, the average divergence between one-year certificates of deposit rate and one-month Mibor was 21 basis points. Mr Param Sarma, forex consultant, explains that variance between the two rates could be because the Mibor reflects liquidity conditions, while deposit rates are a function of banks’ attempts to rectify structural imbalances in the balance sheet.

For instance, when deposit growth is low relative to loan growth, banks tend to depend on certificates of deposit and bulk deposits to bridge the gap.

A senior bank official pointed out that the current system of polling rates to arrive at the Mibor too is under review. Once tweaked, the rate would reflect the traded rates, instead of polled rates.

(with inputs from N.S.Vageesh and K Ram Kumar)

(This article was published on July 14, 2012)
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