Context:
Indian Lenders Ask Reserve Bank of India for Overhaul in Benchmark on Indexed Overnight Swaps.
Background:
- Indian lenders have demanded that the Reserve Bank of India replace the benchmark for interest rate swaps as they have failed to pass the correct pricing in the swap market.
- The existing benchmark is MIBOR, the Mumbai Interbank Offered Rate.
- MIBOR (Mumbai Interbank Offered Rate) is the interest rate at which banks in India lend to one another in the short-term interbank market for overnight loans.
- The propositions offered by banks are to switch with SORR, an acronym for Sterling Overnight Reference Rate, which is expected to be more effective with regard to the discovery of accurate prices in the marketplace of interest rate swaps.
Indexed Overnight Swaps (IOS) are financial derivatives where one party exchanges a fixed interest rate for a floating rate, typically tied to an overnight benchmark such as the Overnight Indexed Average (OIA). The floating rate is usually linked to an overnight benchmark like the Overnight Index Swap Rate (OIS), which reflects short-term interest rates. These swaps are used by market participants to hedge or speculate on future interest rate movements.
Key Points
- The need is to make interest-rate benchmarks more credible and less disparate and more representative of market events.
- MIBOR limitations arise from the fact of uncollateralized trade.
- SORR is repo based, which is more representative of the actual market situation.
RBI’s Approval:
- On 6th December 2024, RBI approved the proposal for developing the SORR benchmark for use in Indian markets.
Importance:
- SORR is a more reliable and transparent benchmark for OIS.
- It is in line with the global efforts to make the interest rate benchmarks more reliable.
