WHY IN NEWS?

Reserve Bank of India (RBI) issued an advisory to banks and other financial institutions to be prepared for year-end transition from London Interbank Offered Rate (Libor).

Transition from Libor

Global transition from Libor became necessary because banks were manipulating rate in 2007-08. Following the incident, investigation was led by Financial Services Authority (FSA) of Britain.

Highlights

• India’s exposure to borrowings linked to benchmark is estimated to be around $331 billion.
• RBI asked banks and other financial institutions to incorporate robust fall-back clauses before cessation date, in all financial contracts where maturity is after announced cessation date of benchmark.
• It asked banks to ensure that new contracts entered into before December 31 but mature after cessation date include fall-back clauses.
• Banks are also encouraged to cease using Mumbai Interbank Forward Outright Rate (Mifor).