RBI seeks to alter pricing method for money market rates

The Reserve Bank of India (RBI) on Friday recommended moving away from determining money market benchmarks through the current poll of traders towards one based on the trades done during a set period to remove any possible scope of manipulation.

The draft report issued by the RBI recommended that the overnight Mumbai Interbank Bid Rate-Mumbai Interbank Offered Rate (Mibid-Mibor) fixing, a key gauge in money markets, be based on the volume-based weighted average of traded rates from 9 to 10 in the morning.

That would move pricing away from the current system based on a poll of trader submissions.

Also Read: RBI may lower banks' exposure limit to single group

The central bank committee also recommended basing the government securities yield curve, including for illiquid debt, on the basis of volume-based weighted average rates instead of last traded yields.

Among other suggestions, the RBI proposed banks set pricing for state development bonds at a spread based on the last two auctions, instead of calculating those bond yields at a fixed spread of 25 basis points over government debt.

The central bank has asked market participants reply with feedback to the draft rules by January 17.