Mumbai Interbank Forward Offer Rate (MIFOR)

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

The term Mumbai Interbank Forward Offer Rate (MIFOR) refers to a benchmark rate used by commercial banks for certain financial contracts in India. MIFOR is used for setting prices on forward-rate agreements and derivatives. It is a mix of the London Interbank Offered Rate (LIBOR) and a forward premium derived from Indian foreign exchange markets. Daily MIFOR rates are published by Financial Benchmarks India Pvt Ltd. India's central bank issued an advisory in mid-2021 encouraging all national banks to stop using MIFOR for new contracts by the end of 2021 as a result of the plan to phase out LIBOR.

Key Takeaways

  • The Mumbai Interbank Forward Offer Rate is the rate that Indian banks use as a benchmark for setting prices on forward-rate agreements and derivatives.
  • MIFOR is a mix of the London Interbank Offered Rate and a forward premium derived from Indian forex markets.
  • The Reserve Bank of India discontinued the use of MIFOR following the rate-fixing scandal involving LIBOR, which is used as a reference rate.
  • Adjusted and modified MIFOR rates are published on a daily basis by Financial Benchmarks India Pvt. Ltd.
  • MIFOR is similar to MIBOR (India's interbank rate) except that it uses an element of currency exchange.

Understanding the Mumbai Interbank Forward Offer Rate (MIFOR)

MIFOR is a benchmark for setting derivatives rates in India. It brings an element of currency exchange into the mix. This benchmark is configured by including the U.S. dollar overnight LIBOR rate published at 11:00 a.m. London time every day. LIBOR is a reference rate that is comprised of the average of interest rates supplied by multiple banks.

The benchmark also includes the swap points of a currency swap between the U.S. dollar (USD) and Indian rupee (INR) of the same maturity. That's because banks pay LIBOR to borrow dollars in the interbank market and get rupees via the currency swap. A premium is added to the swap points between the U.S. and India to compensate for the banks involved that furnish the rates in order to compensate for the credit risk involved. Calculating MIFOR may be difficult because an unknown credit spread is added to the mix.

MIFOR doesn't simply use the interest rate differential between the U.S. and India for the specified maturity when calculating the swap points. For example, let's say the three-month U.S. rate is 4% while the India three-month rate is 6%. The interest rate differential would be 2%, but MIFOR adds a risk premium to that differential, which changes frequently based on the banks providing the interbank rates.

Rates were published by India's central bank, the Reserve Bank of India (RBI) to help investors so they wouldn't have to calculate the swap points, which is the interest rate differential between the U.S. and India for a particular settlement date such as one month, two months, and so on.

The original intention of MIFOR was for hedging purposes. However, many corporate entities used MIFOR for currency speculation.

Special Considerations

In July 2021, the RBI issued an advisory to all national banks to stop using MIFOR as a benchmark as of Dec. 31, 2021, for any new contracts issued after that date because the bank began phasing out LIBOR. The move was in response to a rate-fixing scandal involving bankers at several large international financial institutions that led to the validity of LIBOR as a benchmark.

The RBI stopped publishing MIFOR rates. They are now published by Financial Benchmarks India Pvt. Ltd., a private company owned by the Fixed Income Money Market and Derivatives Association of India, the Foreign Exchange Dealers' Association of India, and the Indian Banks' Association. Adjusted rates from June 15, 2021, are published daily while modified rates from June 30, 2021, are published for use for legacy contracts.

The RBI first grew concerned over the potential economic downside risk of having an abundance of speculative off-balance-sheet entities, such as currency swaps. The RBI banned the use of MIFOR, and other non-rupee denominated benchmarks on May 20, 2005, in hopes that doing so would lower the amount of currency speculation. The RBI relaxed the ban somewhat the following May and allowed MIFOR to be used only in interbank-related transactions.

The RBI continues to allow contracts referencing MIFOR after Dec. 31, 2021, just "for the purpose of managing risks arising out of LIBOR/MIFOR referenced contracts undertaken on or before December 31, 2021."

Mumbai Interbank Forward Offer Rate (MIFOR) vs. London Interbank Offered Rate (LIBOR) vs. Mumbai Interbank Offered Rate (MIBOR)

MIFOR is slightly different from LIBOR and Mumbai Interbank Offered Rate (MIBOR). Both MIFOR and MIBOR have similar uses in the Indian financial markets, but the difference is that MIFOR brings an element of currency exchange into the mix.

London Interbank Overnight Rate (LIBOR)

LIBOR is an average value of interest rates calculated from daily estimates submitted by the leading global banks. This benchmark served as the first step to calculating interest rates on various loans throughout the world. For instance, a variable floating-rate debt instrument might be quoted at 100 basis points over LIBOR.

It was abandoned for new loans issued as of Dec. 31, 2021. This was in response to conerns within financial markets that arose after a rate-fixing scandal that began in 2012. Traders submitted artificially high or low rates to force the LIBOR rate up or down to support the activities of their own institutions. As of December 2020, plans were in place to replace LIBOR with other benchmarks, such as the Secure Overnight Financing Rate (SOFR) and the Sterling Overnight Index Average (SONIA).

Mumbai Interbank Offered Rate (MIBOR)

This rate is one iteration of India's interbank rate, which is the rate of interest charged by a bank on a short-term loan to another bank. Banks borrow and lend money to one another on the interbank market in order to maintain appropriate, legal liquidity levels, and to meet reserve requirements placed on them by regulators. Interbank rates are made available only to the largest and most creditworthy financial institutions.

MIBOR is calculated every day by the National Stock Exchange of India (NSE) as a weighted average of lending rates of a group of major banks throughout India, on funds lent to first-class borrowers. This is the interest rate at which banks can borrow funds from other banks in the Indian interbank market.

Disadvantages of MIFOR

As with any interest and currency exchange rate transaction, there is the potential for risk associated with MIFOR, particularly if not hedged properly. Both interest rates and currency rates can fluctuate widely. For example, if there is a credit risk issue with the banks involved, the MIFOR rate will likely be impacted. As a result, MIFOR and any derivative that uses it in its calculation can have risk associated with it.

In April 2017, the Working Group on Sterling Risk-Free Reference Rates (a group of active, influential dealers in the sterling interest rate swap market) announced that SONIA would be the preferred, near risk-free interest rate benchmark in order to provide an alternative interest rate to the outgoing LIBOR.

Example of MIFOR

Below is a table from the RBI, which contains the MIFOR rates posted on February 25, 2019. Please note that the rates are changed and updated daily on the central bank's website:

  • We can see that the one-month MIFOR rate was 6.9342% while the 12-month MIFOR was 7.07%.
  • In other words, if a company entered into a transaction, they would effectively pay those rates for the settlement dates listed.
MIFOR Rate February 22, 2019
MIFOR Rate February 22, 2019. Investopedia 
Article Sources
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  1. Reserve Bank of India. "Cessation of LIBOR: Transition arrangements."

  2. Financial Benchmarks India Pvt. Ltd. "Background."

  3. Reserve Bank of India. "Rupee Interest rate derivatives (including rupee – foreign currency derivatives) – Setting of limits for non-option derivative contracts."

  4. Intercontinental Exchange, Inc. "ICE LIBOR."

  5. NSE. "Reference Rates - FIMMDA-NSE MIBID MIBOR."

  6. Bank of England. "SONIA recommended as the sterling near risk-free interest rate benchmark."

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