Source: BL
Context:
India is revamping its key financial benchmark system to replace the Mumbai Interbank Outright Rate (MIBOR) with the Secured Overnight Rupee Rate (SORR), aligning with global trends away from unsecured interbank rates like Libor.
Key Highlights:
- SORR Introduction:
- SORR is a secured overnight borrowing rate, based on repurchase (repo) market transactions backed by securities such as government bonds.
- Unlike MIBOR, which is derived from a small unsecured interbank market, SORR reflects broader market liquidity including mutual funds and non-bank participants.
- Need for Transition:
- MIBOR underpins ~$1 trillion in interest-rate swaps but is based on only ~2% of the funding market.
- Secured rates provide a more accurate reflection of borrowing costs, improving transparency for derivatives, consumer loans, and hedging instruments.
- Benefits:
- Provides a robust benchmark for domestic and foreign investors.
- Facilitates foreign participation in India’s debt markets by improving hedging and risk management.
- Average SORR has been ~10 basis points lower than MIBOR since July 2025.
- Challenges:
- Transition requires banks to manage legacy contracts and new trades, similar to the global Libor transition.
- Timeline for full adoption is not yet announced, dependent on liquidity in SORR-linked swaps market.
- Potential risks for derivative pricing if MIBOR-linked contracts are not properly adjusted.
- Global Context:
- Mirrors global trends such as the SOFR (Secured Overnight Financing Rate) adoption in the US, post-Libor.
- India’s repo market now involves mutual funds, insurance companies, and banks, reflecting the evolving financial landscape.
MIBOR vs SORR
| Feature | Mumbai Interbank Outright Rate (MIBOR) | Secured Overnight Rupee Rate (SORR) |
|---|---|---|
| Type of Rate | Unsecured interbank rate | Secured overnight rate |
| Underlying Market | Banks’ lending to each other without collateral | Banks’ overnight lending collateralized by government securities |
| Tenor | Typically short-term, overnight, or term | Overnight only |
| Benchmark Usage | Reference for loans, floating-rate bonds, derivatives, and money market instruments | Will replace MIBOR as a risk-free benchmark for pricing loans, bonds, derivatives, and other financial contracts |
| Risk Profile | Higher credit risk (reflects interbank default risk) | Lower credit risk (secured by government securities, virtually risk-free) |
| Global Alignment | Similar to LIBOR (London Interbank Offered Rate), which is being phased out | Similar to SOFR (US), SONIA (UK), and €STR (Eurozone) – risk-free overnight rates |
| Calculation Method | Based on quotes submitted by banks in the interbank market | Based on actual transactions in the secured overnight repo market |
| Regulatory Aim | Traditional benchmark for Indian rupee money markets | Enhance transparency, reliability, and align with global risk-free rate standards |
