Mumbai: The Reserve Bank of India on Thursday asked banks and financial institutions to replace LIBOR (London Interbank Offered Rate) as the reference rate for new financial contracts. Other alternative reference rates accepted at the level were asked to be used. This directive of the Reserve Bank has come after a decision by the Financial Conduct Authority (FCA) of Britain. Under this, on March 5, 2021, it was announced that all LIBOR settings would either cease to be provided by any administrator or would no longer be representative rates.
RBI has prohibited banks and financial institutions from entering into new financial contracts on the basis of LIBOR as the reference rate to deal with the emerging situation. Instead, any widely accepted Alternative Reference Rate (ARR) has been asked to be used at the earliest and in any case by December 31, 2021.
The central bank recommended to financial institutions that all financial contracts should include a provision for an alternative rate that is linked to the LIBOR reference rate and that matures after the declared expiration date of LIBOR settings.
RBI has also advised financial institutions to stop using the Mumbai Interbank Forward Outwrite Rate (FIFor), which is a standard rate and linked to LIBOR, by December 31, 2021.