The LIBOR is the global average interest rate estimated by leading Banks in London that they would be charged for their borrowing from other Banks.
It is considered as primary benchmark responsible for short term interest rates around the world.
Many financial institutions, credit card agencies etc set their own rates on the basis of LIBOR.
Recent Controversy:
• LIBOR Is calculated by LIBOR panel, on the basis of rates submitted by leading Banks to the LIBOR panel.
• And With excluding higher and lower extreme rate, panel chooses rate from their middle.
• So Banks tries to submit the manipulated rates for their benefits, for their commercial interest to acquire more profit.
• If the market and investment go down, such manipulation in terms of rates to maintain the profits we may see.
• As it was happened during Financial Crisis 2008, during that time also, Banks submitted lower rates.
What could be the solution? What Reserve Bank Of India Says?
• Many countries try to look for the other alternatives too.
• In India, RBI stated that Secured Overnight Financing Rate (SOFR) and Modified Mumbai Interbank Forward Outright Rate (MMIFOR) to be used by the financial institutions.
• US Federal Reserve – Had announced the Secured Overnight Financing Rate (SOFR) an alternative to the LIBOR.
• Greater transparency needed in the estimation of Rates.
• Accuracy of Rates estimation should be there, so that it would be appreciated by all over the world.
• Market manipulation should be less, it should be rational.