The Reserve Bank has issued an advisory to banks and other RBI-regulated entities emphasizing the need for preparedness for the transition away from London Interbank Offered Rate (LIBOR). In a press release issued from Mumbai today, RBI has said that banks and financial institutions must avoid entering into new financial contracts that use LIBOR as benchmark and instead use any widely accepted alternative reference rate. They have also been urged to incorporate robust fallback clauses in all financial contracts that reference LIBOR and are set to expire after 31st December 2021. RBI has further advised banks to cease using the Mumbai Interbank Forward Outright Rate as soon as possible.
The Reserve Bank has said that it will continue to monitor the evolving global and domestic situation with regard to the transition away from LIBOR and proactively take steps, as necessary, to mitigate associated risks in order to ensure a smooth transition.
It may be recalled that the UK’s Financial Conduct Authority had announced in March this year that all LIBOR settings will cease to be representative in case of Pound sterling, Euro, Swiss franc and Japanese yen after 31st December 2021.