Mumbai Interbank Forward Offer Rate (MIFOR)

What Is the Mumbai Interbank Forward Offer Rate (MIFOR)?

The Mumbai Interbank Forward Offer Rate (MIFOR) is the rate that Indian banks use as a benchmark at setting costs on forward-rate agreements and derivatives. It is a mix of the London Interbank Offered Rate (LIBOR) and a forward premium derived from Indian forex markets.

The Reserve Bank of India (RBI) banned the utilization of MIFOR in 2005 with expectations of reducing currency speculation yet loosened up that decree a year after the fact, restricting it to interbank transactions as it were.

Grasping MIFOR

The Reserve Bank of India (RBI) distributes MIFOR on its website so investors don't need to ascertain the swap points, which is the interest rate differential between the U.S. what's more, India for a specific settlement date like one month, two months, etc.

Be that as it may, it's challenging to compute MIFOR on the grounds that it utilizes currency swap points notwithstanding the LIBOR interest rate plus an obscure credit spread added by the Reserve Bank of India.

LIBOR is a reference rate and is involved the average of interest rates supplied by various banks. MIFOR makes up for the credit risk of those banks by having a risk premium in its calculation. The credit risk premium is added to the swap points between the U.S. furthermore, India to make up for the banks included that outfit the rates.

All in all, MIFOR doesn't just utilize the interest rate differential between the U.S. furthermore, India for the predefined maturity while ascertaining the swap points. For instance, suppose the three-month U.S. rate is 4% while the India three-month rate is 6%. The interest rate differential would be 2%, yet MIFOR adds a risk premium to that differential, which changes as often as possible based on the banks giving the interbank rates.

What Does MIFOR Tell You?

MIFOR is a benchmark for setting rates for derivatives in India, yet to better comprehend its function, we must comprehend how interbank interest rates connect with MIFOR.

LIBOR

For survey, LIBOR is an average value of interest-rates, which is calculated from gauges presented by the leading global banks consistently. It represents London Interbank Offered Rate and fills in as the initial step to working out interest rates on different loans all through the world. For example, a variable floating rate debt instrument may be quoted at 100 basis points over LIBOR. As of December 2020, plans were in place to phase out the LIBOR system by 2023 and replace it with different benchmarks, for example, the Sterling Overnight Index Average (SONIA).

LIBOR and MIBOR

The Mumbai Interbank Offered Rate (MIBOR) is one emphasis of India's interbank rate, which is the rate of interest charged by a bank on a momentary credit to another bank. Banks borrow and loan money to each other on the interbank market to keep up with proper, lawful liquidity levels, and to meet reserve requirements placed on them by regulators. Interbank rates are made accessible just to the biggest and most creditworthy financial institutions.

MIBOR is calculated consistently by the National Stock Exchange of India (NSEIL) as a weighted average of lending rates of a group of major banks all through India, on funds loaned to top notch borrowers. This is the interest rate at which banks can borrow funds from different banks in the Indian interbank market.

MIFOR, MIBOR, and LIBOR

MIFOR is marginally unique in relation to LIBOR and MIBOR. Both MIFOR and MIBOR have comparative purposes in the Indian financial markets, yet the difference is that MIFOR brings an element of currency exchange into the mix.

MIFOR is designed by including the U.S. dollar overnight LIBOR rate distributed at 11:00 a.m. London time consistently. MIFOR likewise incorporates the swap points of a currency swap between the U.S. dollar and Indian rupee (USD/INR) of a similar maturity. The justification behind this is that an Indian bank pays LIBOR to borrow dollars in the interbank market and afterward gets rupees through the currency swap. As stated before, there's a credit risk premium added to the swap points between the U.S. furthermore, India to make up for the banks included that outfit the rates.

Initially, the aim of MIFOR was for hedging purposes. Notwithstanding, numerous corporate substances involved MIFOR for currency speculation.

The Reserve Bank of India (RBI) at last became worried over the potential economic downside risk by having a wealth of speculative wobbly sheet elements, (for example, currency swaps). The RBI restricted the utilization of MIFOR, and other non-rupee named benchmarks on May 20, 2005, with the expectation that doing so would bring down the amount of currency speculation. Notwithstanding, the RBI loosened up the ban fairly the next May and permitted MIFOR to be utilized exclusively in interbank-related transactions.

Inconveniences of MIFOR

Similarly as with any interest rate and currency rate transaction, there is the potential for risk associated with MIFOR, especially in the event that not hedged as expected. Both interest rates and currency rates can change widely. For instance, in the event that there is a credit risk issue with the banks implied, the MIFOR rate will probably be influenced. Subsequently, MIFOR and any derivative that involves it in its calculation can have risk associated with it.

Since MIFOR involves LIBOR as its base, the global push to find a replacement for LIBOR as the benchmark for different rates is an issue here. New benchmarks, for example, the Sterling Overnight Index Average (SONIA), are beginning to replace LIBOR.

In April 2017, the Working Group on Sterling Risk-Free Reference Rates, which is a group of active, persuasive dealers in the sterling interest rate swap market, announced SONIA would be it's preferred, close to risk-free interest rate benchmark. This change gives an alternative interest rate to the active London Interbank Offered Rate (LIBOR).

Real World Example of MIFOR

The following is a table from the Reserve Bank of India, which contains the MIFOR rates posted on February 25, 2019. If it's not too much trouble, note that the rates are changed and refreshed daily on the central bank's website:

We can see that the one-month MIFOR rate was 6.9342% while the year MIFOR was 7.07%.
At the end of the day, on the off chance that a company went into a transaction, they would really pay those rates for the settlement dates listed.

Features

MIFOR is somewhat unique in relation to LIBOR and MIBOR. Both MIFOR and MIBOR have comparable purposes in the Indian financial markets, yet the difference is that MIFOR brings an element of currency exchange into the mix.
MIFOR is a mix of the London Interbank Offered Rate (LIBOR) and a forward premium derived from Indian forex markets.
The Mumbai Interbank Forward Offer Rate (MIFOR) is the rate that Indian banks use as a benchmark at setting costs on forward-rate agreements and derivatives.