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Reserve Bank of India bars Mifor (Mumbai Interbank Forward Offer Rate)swaps

The Reserve Bank of India (RBI) has asked market participants to discontinue trades in Mifor swaps. On specific request from players, the RBI had earlier permitted Libor rates, which was used to price Mifor rates, the central bank has now asked players to use domestic benchmarks for market making or hedging balance sheets.

The Fixed Income Money Markets and Derivatives Association (FIMMDA) of India, comprising money market participants, has suggested that the ban on Mifor (Mumbai Interbank Forward Offer Rate) benchmark, used to price interest rate derivatives, be lifted for inter-bank transactions.

While the RBI has been concerned about the rapid growth in outstanding contracts in Mifor to over Rs 1,00,000 crore, the more important issue is of it being used as a mere speculative tool by corporates, without any underlying exposure such as loans under ECBs.

RBI Circular dated 20th May 2005

Please refer to the guidelines for interest rate derivatives circulated on July 7, 1999 whereby banks / FIs and PDs were enabled to use Forward Rate Agreements (FRA) and Interest Rate Swaps (IRS) in order to manage and control risks arising from deregulation of interest rates. These institutions were also permitted to use the products for market making and offer them to corporates for hedging balance sheet exposures. With regard to the Benchmark Rate, market participants were permitted to use any domestic money or debt market rate provided the methodology of computing the rate was objective, transparent and mutually acceptable to counterparties.

2. However, on specific requests from banks, LIBOR was permitted to be used as benchmark, since rupee benchmarks other than the MIBOR were then still to develop and find wide acceptance. Over the years, the depth and liquidity in the money markets has increased following the limits placed on call money, development of inter-bank term deposits, market repos, CBLOs, CPs, CDs and increased issuance and activity in treasury bills. Market participants, are therefore, advised that henceforth, they should use only domestic rupee benchmarks for interest rate derivatives. Market participants are, however, given a transition period of six months for using MIFOR as a benchmark, subject to review and are advised to desist from taking any measures that would undermine the intent of this circular.

3. The existing contracts with non-domestic rupee benchmarks may however continue as per the terms of the contract or be closed out on mutually agreed terms between the counterparties to the contract.

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