Mumbai Interbank Offer Rate (MIBOR): Definition, vs. MIBID

The Mumbai Interbank Offer Rate (MIBOR) is a crucial benchmark interest rate in India, serving as the reference rate for various financial instruments and transactions. Here's a detailed analysis of MIBOR:

1. **Definition and Importance**:
- MIBOR is the rate at which banks in India charge other banks for lending them money, effectively serving as the cost of short-term borrowing in the interbank market.
- It is a key component in India's financial infrastructure, influencing monetary policy and ensuring liquidity within the financial system.
2. **Calculation Methodology**:
- MIBOR is calculated daily by the National Stock Exchange of India (NSEIL) based on the lending rates of major banks. This calculation involves a combination of polling and bootstrapping methods to ensure accuracy and minimize influence from market participants.
- The rate is determined by taking the weighted average of the lending rates of all major banks or groups of banks throughout India.
3. **MIBOR vs. MIBID**:
- MIBID (Mumbai Interbank Bid Rate) is the rate at which banks want to pay to borrow money, while MIBOR is the rate at which banks want to charge for lending money.
- MIBID is generally lower than MIBOR due to the spread banks aim to earn on loans.
- Together, MIBOR and MIBID constitute the bid-offer spread for Indian overnight lending rates.
4. **Historical Context**:
- MIBOR was introduced in 1998 by the Committee for the Development of the Debt Market and has since been used as a benchmark for most money market deals in India.
- The MIBOR framework has evolved to include various tenors, such as overnight, 14-day, 1-month, and 3-month rates, to cater to different market needs.
5. **Current Status**:
- The latest version of MIBOR is the Financial Benchmarks India Pvt Ltd (FBIL) Overnight Mumbai Interbank Outright Rate (FBIL-Overnight MIBOR), which is based on actual transaction rates and includes a maximum and minimum rate.
- MIBOR continues to play a vital role in India's financial markets, particularly in the pricing of derivatives, interest rate swaps, and floating-rate notes.

In conclusion, MIBOR is a critical interest rate benchmark in India, reflecting the cost of borrowing in the interbank market and influencing a wide range of financial transactions. Its calculation and evolution reflect the Indian financial system's development and the regulatory framework's adaptation to market changes.