Mumbai Interbank Forward Offer Rate (MIFOR) Explained: Key Insights & 2023 Update

Understanding Mumbai Interbank Forward Offer Rate (MIFOR)

The Mumbai Interbank Forward Offer Rate, commonly known as MIFOR, served as a pivotal benchmark used by Indian banks to price forward-rate agreements and derivative instruments. This rate uniquely combined the London Interbank Offered Rate (LIBOR) with a forward premium derived from the Indian foreign exchange market, providing a blended reference for currency-related financial contracts.

Core Highlights

• MIFOR was instrumental for pricing derivatives and forward-rate agreements within India's banking sector.
• It integrated the U.S. dollar LIBOR with currency swap premiums between USD and INR, reflecting exchange rate dynamics.
• The Reserve Bank of India (RBI) ceased its endorsement following LIBOR’s discontinuation due to regulatory reforms and rate manipulation concerns.
• Financial Benchmarks India Private Limited (FBIL) continued publishing adjusted MIFOR rates until June 30, 2023.
• MIFOR differs from MIBOR as it incorporates currency exchange components alongside interest rate benchmarks.

How MIFOR Was Calculated

MIFOR combined the overnight USD LIBOR rate with currency swap points between the U.S. dollar and Indian rupee for equivalent maturities. Banks would borrow dollars at LIBOR rates and swap them for rupees, adding a risk premium to account for credit exposure. This approach meant MIFOR's calculation was complex, involving fluctuating credit spreads beyond simple interest rate differentials.

For instance, if the three-month U.S. interest rate was 4% and India's was 6%, the base differential would be 2%. However, MIFOR added a varying risk premium on top, reflecting market perceptions and credit risk associated with the participating banks.

Primary Purpose

Initially, MIFOR was designed for hedging currency risks. Over time, however, many corporations utilized it for currency speculation, leveraging its unique structure to manage or capitalize on exchange rate movements.

The Transition Away From MIFOR and LIBOR

In response to the LIBOR rate-fixing scandal and global regulatory changes, the RBI advised Indian banks in mid-2021 to discontinue using MIFOR for new contracts by the end of that year. LIBOR's phase-out necessitated this shift, as LIBOR was a crucial component of MIFOR's calculation.

Following RBI’s directive, FBIL took over daily MIFOR rate publications temporarily, providing adjusted and modified versions to support legacy and new contracts until June 30, 2023, when MIFOR publishing ceased entirely.

MIFOR Versus LIBOR and MIBOR

LIBOR was a global benchmark reflecting average interbank borrowing costs but was discontinued due to manipulation scandals and replaced by alternative rates like the Secured Overnight Financing Rate (SOFR).

MIBOR is India’s interbank offered rate exclusively based on domestic lending between banks without currency swap components, unlike MIFOR which incorporates foreign exchange elements.

Disadvantages and Risks of MIFOR

MIFOR carried inherent risks, particularly credit risk associated with the banks contributing to rate calculations. Without appropriate hedging strategies, derivatives linked to MIFOR could expose investors to volatility and credit uncertainties.

Frequently Asked Questions

When Did India Phase Out LIBOR?

The RBI began urging banks in 2020 to develop transition plans away from LIBOR and mandated that new contracts referencing LIBOR cease by December 31, 2021.

What Differentiates MIFOR from Modified MIFOR?

The Modified MIFOR replaces LIBOR with SOFR—a secured, transaction-based overnight rate—reflecting a more transparent and reliable benchmark for U.S. dollar-denominated contracts.

Are SOFR Rates Generally Lower Than LIBOR?

SOFR is backward-looking, based on actual transactions, whereas LIBOR was forward-looking with bank-submitted estimates. This fundamental difference often results in SOFR being lower but more stable compared to LIBOR.

Conclusion

MIFOR played a crucial role in India’s financial markets by bridging domestic interest rates with international benchmarks through currency swap premiums. The discontinuation of LIBOR triggered the phase-out of MIFOR, leading to the adoption of Modified MIFOR based on SOFR. This transition aligns with global efforts to enhance transparency and reduce risks in benchmark interest rates.

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