However, lenders say they're not sure which alternative will be more reliable
With the end near the London Interbank Offered Rate (LIBOR), the Reserve Bank of India (RBI) on Thursday told banks and other financial institutions to stop using the benchmark as soon as possible and mandatorily by December 31 and move to any Alternative Reference Rates (ARR).
Secured Overnight Financing Rate (SOFR) and Sterling Overnight Interbank Average Rate (SONIA) are the two popular alternatives but are nowhere near as popular internationally as Libor, which is being phased out by this year’s end.
Labor had to be scrapped after a rate-fixing scandal was unearthed a few years back. In August 2020, the RBI had advised banks to move away from LIBOR. Almost all banks that deal in foreign exchange by now are ready with the transition to ARR, but they have not yet decided which one will be the most reliable ARR.
Bankers say it is unlikely that Indian banks will take a lead on this issue. Instead, they will follow the international practices that evolve.
“While certain US dollar Libor settings will continue to be published till June 30, 2023, the extension of the timeline for cessation is primarily aimed at ensuring roll-off of USD Libor-linked legacy contracts, and not to encourage continued reliance on Libor,” said the RBI in an advisory to banks.
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