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Morning Briefing
Liquidity Concept

Short Term Benchmark Rate

Last fortnight, Concepts introduced Interest Rate Swap (IRS). This fortnight, Concepts takes the subject forward to one of its most important characteristics - the determination of a Benchmark rate. As explained, there are broadly 2 kinds of IRS - fixed to floating and floating to floating.

A Fixed to Floating swap means the exchange of a fixed rate of interest in exchange for a floating rate benchmark. A Floating to Floating swap means the exchange of one Floating Rate benchmark with another Floating Rate benchmark.

Hence, any IRS has a benchmark against which it is done. The determination of a correct benchmark should have the following characteristics:

  • Money or Debt Market benchmark for IRS
  • Liquid and Deep
  • Accessibility
  • Transparent
  • Acceptable by both the counterparties
  • Availability for the tenor of the deal
  • A statistically sound benchmark
  • Polling to capture all the trades in the market (benchmark rates are generally market polled rates)
  • Should capture the volatility in the market but at the same time should not be unduly influenced by it.
  • Actual traded levels rather than the indicative levels should be taken
  • If polling done on real time basis then there should be no lead lag effect while collecting data


  • As discussed in last fortnight’s Concepts, the common benchmarks used in the Indian context are:
  • Overnight Inter-Bank Call Rates
  • Commercial Paper Rates
  • Treasury Bill Rates
  • Government of India security rates/yields
  • Inter-bank term money rates
  • Inter-bank Rupee/USD Forward rates
  • Certificate of Deposit Rates
  • Prime Lending rates
  • Bank Rate

    For short term IRS, there are a very few benchmarks that can be used for IRS. In this context, the corporate should take care of the following points, before deciding upon the benchmark:
  • The underlying hedge that the corporate is undertaking the IRS for
  • Understanding the determination of the benchmark
  • The benchmark, from a corporate’s point of view, should not be very volatile.

    Concepts introduces the benchmarks that can be used in the Indian markets by corporates in the short term, along with graphical representation of their movements over the past year & its volatility (the standard deviation of their daily returns - the higher the number, the more volatile are the benchmark rates).

    call avarage Overnight Inter-Bank Call Rates (Also called Overnight Indexed Swaps - OIS)

    This is the rate which banks borrow for a typically, one day. The rate is market determined and only accessed by banks. However, fixed rate swaps for various tenors are quoted daily based on the movement of these overnight rates. The following graph demonstrates the daily movement of call rates, as declared at 4.00p.m. by Reuters. Overnight call rates can be used for creating floating rate issuance for a corporate’s short tenor borrowings (like Liquidity recommendations) or for playing the short term views. Given the high volatility, call rates should be used as benchmarks by corporates understanding the inter-bank treasury system.

    3 Month Mumbai Interbank Overnight Indexed Swap (MIOIS) Rates

    3month ruetor Fixed rate OIS are quoted by the inter-bank participants daily, varying on the movement of the underlying call rates. OIS (i.e. fixed rate for a particular tenor against the exchange of daily compounded call rates) are quoted for various tenors. 3 Month MIOIS is the fixed rate against which daily compounded call rates would be exchanged at the end of 3 months. As the call rates move daily, so does the 3 Month MIOIS. Hence, these can also be used as a valid benchmark by corporates, as these are less volatile than the underlying call rates. The following graph demonstrates the daily movement of 3 Month MIOIS, as declared by Reuters.

    NSE Term Money Rates
    National Stock Exchange (NSE) polls and fixes inter-bank term money rates, i.e. rates at which banks would borrow for various tenors, more than 1 day. These are declared every day. Corporates can use NSE 1 month or 3 months term rates, as they are statistically sound and not as volatile as the call rates. The following graph demonstrates the daily movement of 1 month NSE MIBOR & 3 months NSE MIBOR.

    Days Days

    Days Days

    3 Month MIFOR (Implied Forwards)
    These are 3 months implied forward rates (i.e. 3 month inter-bank forwards + 3 months LIBOR). These can be used by corporates to hedge their forward receivables / payables. The following graph demonstrates the daily movement of 3 Month MIFOR, as declared by Reuters.
    3 Month Commercial Paper
    This is one of the best benchmarks for corporates, as these are perfect hedges for the corporates against their CP issuance. The following graph demonstrates the daily movement of 3 Month CP Reference Rates as declared by Reuters.


    As seen above, the shorter the benchmark, the more volatile it becomes. All the above mentioned are short term liquid benchmark rates, which can are liquid and easily reversible. There are other long term benchmarks like Government Security Yields, Banks Prime Lending Rates, RBI Bank Rate, etc. which are illiquid benchmarks. Corporates should first choose the best benchmark as a hedge against their underlying liabilities and then understand the determination of the underlying benchmark chosen.

    DISCLAIMER
    The above views are based on the latest available information. Though the information sources are believed to be reliable, the information is not guaranteed for accuracy. While the views are proffered with the best of intentions, neither the author, nor the firm are liable for any losses that may occur as a result of any action based on the above. The financial markets, and especially the Indian money markets, are illiquid and inherently risky and it is assumed that those who trade these markets are fully aware of the risk of real loss involved.

    Unauthorized copying, distribution or sale of this publication is strictly prohibited.
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