RBI releases financial benchmarks report
The Reserve Bank of India (RBI) on Friday released a report of its committee on financial benchmarks that studied various issues related to the benchmarks with regards to their quality, setting methodology and governance systems.
Financial benchmarks are primarily used for pricing, valuation and settlement purposes in financial contracts.
The committee, under the chairmanship of RBI's executive director, Vijaya Bhaskar, identified the major rupee interest rate benchmarks and foreign exchange benchmarks based on their extent of usage and relevance to the financial system.
The major rupee interest rate benchmarks are Mibid, Mibor, Mifor, government securities yield curve, T-bill curve, CP and CD curves, while the major foreign exchange benchmarks identified are RBI reference rate, FEDAI's spot fixings, forward contracts, and FCNR (B) rates.
"On the benchmark quality and setting methodology, the Committee observed that although the methodologies followed for various benchmarks are generally satisfactory, several measures need to be taken to further strengthen the benchmark quality and setting methodology," the RBI report said.
It said that Fixed Income Money Market and Derivative Association of India (FIMMDA) and Foreign Exchange Dealers' Association of India (FEDAI) may be designated as administrators for all the rupee interest rate and foreign exchange benchmarks respectively, with primary responsibility for the entire benchmark setting process.
The benchmark calculation may be based on observable transactions, wherever available, as first layer of inputs subject to appropriate threshold criteria, the report said.
The administrators may periodically review each benchmark and undertake necessary changes.
"New benchmarks may be registered with the concerned administrator before being introduced in the market," the report said. It also said the RBI may continue with the existing system of fixation of Reference Rates, keeping in view the recent international moves.
The committee favours increased role of the RBI for oversight of the benchmark determination in line with international experiences.
Banks may strive to develop the dollar/rupee basis swap market and dollar/rupee forwards (beyond 1 year) so as to obviate the need to use Mifor, the report said.
