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The LIBOR Game, Global Financial Markets and India

Presented By-Ketty Ghujan KrishnajaManpreet Singh Grewal

Prashant RanjanYasha Singh

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1. What is London interbank offered rate? How did things go wrong? Despite the LIBOR Fine imposed by regulators over 20 banks & FLs in August 2012, the tradition to misplay the markets still remains, as seen with RoboBank’s conduct. What is going on ?

• LIBOR (the London Inter-Bank Offered Rate) is intended to reflect the average rate at which banks can obtain unsecured funding in the London money market for a given period and a given currency.

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• Mr. Robson was constantly involved in doing illegal activities and conspiracy. Due to this bad intensions things went wrong in Robo Bank.

• In LIBOR panel banks are selected by CE Benchmark Administration (IBA) according to their market volume, reputation.

• To maintain their market volume many banks are involved in misplay. So that they can earn more profits.

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2.Given the LIBOR Game being played between the Brokers and Large Financial Institutions/ Banks, what is expected impact on:a) Global Capital Marketb) The Global Currencies (US$; Euro& INR)c) Mortgage Marketd) Inflation (Globally & in India)e) Student Loansf) Commodities (Agro Goods; Crude Oil & Gold)

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• Global Capital Market-• LIBOR game will have negative impact on capital

market because LIBOR is considered as a reference point for all financial instruments.

• The Global Currencies (US$; Euro& INR)-• It will have an affect on currency market also. As,

LIBOR rates are quoted in 10 currencies therefore it would affect the demand and supply of currencies.

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• Mortgage Market-• It will affect because LIBOR helps in fixing interest

rates for the mortgage market. It gives idea at what rate could borrower borrows fund.

• Inflation (Globally & in India)-• LIBOR rates will influence the interest rate of

economy. Hence, it will influence the inflation which is inversely related to interest rates.

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• Student Loans-• As LIBOR increases loans will be given at higher rate

and vice-versa. So, there is a positive relation between LIBOR rates and student loans.

• Commodities (Agro Goods; Crude Oil & Gold)-• LIBOR will influence the rate of return which is fixed

in reference to LIBOR rate.

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3. How does this impact the Indian Capital Markets?

• It will hamper the Indian capital market.

• The Libor is widely used as a reference rate / bench mark for many financial instruments in both financial markets and commercial fields.

• MIBOR is fixed in reference to LIBOR rate.

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4. The US$ and EURO have weakened on account of Fiscal Debt Crisis in Europe & Double Dip Recession announced by the US Government. This ought have had a positive impact on the INR giving a push up (appreciation). However the INR has observed a substantial Fall(Weakening) in September 2011 and May-Sep 2012 of over INR 10-15 against a Dollar and INR 6-8 against a EURO. Is there any role of the LIBOR in this and what are other possible reasons.

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• Yes, there was a role of LIBOR in this.

• LIBOR affects mortgage market, currency market, and another credit products. Since LIBOR rates will affect the global currency market it will affect the appreciation and depreciation of Indian Rupee.

• And the other possible reasons are slowing growth, high inflation and widening fiscal and current account gaps.

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