What changed
Previously, banks could use LIBOR as a benchmark for interest rate derivatives on request, as rupee benchmarks were underdeveloped. Now, with improved depth and liquidity in domestic money markets, RBI mandates exclusive use of domestic rupee benchmarks. Existing contracts with non-domestic benchmarks can continue or be closed out mutually.
What it means for you
Banks and lenders must shift their interest rate derivative pricing and risk management to domestic benchmarks like MIBOR, reducing reliance on foreign rates. This aligns derivative markets with local liquidity conditions and reduces exposure to external benchmark volatility. The transition period for MIFOR gives time to adjust, but new contracts must use rupee benchmarks immediately.
What you must do
- Review all existing interest rate derivative contracts and identify those using non-domestic benchmarks like LIBOR.
- Use only domestic rupee benchmarks for new contracts immediately.
- For MIFOR, utilize the six-month transition period, subject to review.
- Engage with counterparties to close out or renegotiate existing non-domestic benchmark contracts on mutually agreed terms.
- Update internal risk management and pricing models to reflect domestic benchmarks.
Who it affects
Scheduled commercial banks, Primary dealers (PDs), All-India financial institutions (AIFIs), Corporate treasuries using derivatives for hedging
What benchmarks are now allowed for interest rate derivatives?
Only domestic rupee benchmarks are permitted. MIFOR is allowed during a six-month transition period, subject to review.
Can we continue using MIFOR during the transition?
Yes, a six-month transition period is allowed for MIFOR, subject to review.
What happens to existing contracts with LIBOR?
Existing contracts with non-domestic rupee benchmarks can continue as per their terms or be closed out on mutually agreed terms between counterparties.