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RBI’s Interest Rate on Floating Rate Bonds Raised to 8.05%

Investors with a low tolerance for risk have a wide range of options, including corporate debt, debt mutual funds, government bonds, and term deposits.

Ambitious investors cannot be held responsible for aiming for the stars when broad benchmark indexes are still hovering near all-time highs. On the other hand, cautious investors are nevertheless looking into a variety of fixed-income investing options.

Another alternative for investors to consider is RBI floating rate bonds, which are both safe and offer reasonable returns to investors. The article will walk through the RBI’s floating rate saving bond, the increasing interest rate, and several other key aspects.

What exactly are RBI Floating Rate Bonds?

RBI floating rate bonds, as the name implies, are bonds with fluctuating interest rates. They went into effect on July 1, 2020, and are available to all Indian residents.

Floating rate bonds are a type of financial security in which the interest rate paid to investors varies over time, often depending on a benchmark interest rate such as the government’s short-term borrowing rate or a specific money market index. These bonds’ interest payments are changed on a regular basis, usually every few months or so, to reflect changes in the underlying benchmark rate.

Reserve Bank of India (RBI): The Reserve Bank of India (RBI) is India’s central banking institution, in charge of developing and implementing the country’s monetary policy. It issues and manages the country’s currency and controls the quantity of money in order to achieve various economic goals such as inflation control and economic growth.

What are the Recent Updates on the RBI’s Floating Rate Savings Bonds?

The Reserve Bank of India (RBI) raised the interest rate on its floating-rate savings bonds (2020) as part of its review in July. The interest rate on RBI savings bonds has been increased from 7.35% to 8.05% until June 30, 2023. The 0.70% increase is due to the government raising the interest rate on the National Savings Certificate (NSC) by 0.60% to 7.7% for the April-June 2023 quarter. RBI Floating rate bonds are completely risk-free investments. The minimum investment is Rs. 1,000, with no upper limit. The interest is paid in January and July of each year. The interest rate on variable rate bonds is tied to the National Savings Certificate (NSC), and these bonds offer an interest rate that is 35 basis points greater than the NSC rate. The most recent increase in the NSC rate (by 60 basis points, to 7.7% for the June quarter) made the interest rate on floating-rate bonds higher. The interest rate on the RBI’s floating-rate savings bonds went up by 70 basis points, from 7.35% to 8.05%.

Is it Worth Investing in the RBI’s Floating Rate Savings Bonds?

The benefit of floating rate bonds is that they offer some protection against changes in interest rates. When interest rates rise, so do bond interest payments, giving investors higher yields. When interest rates fall, the bond’s monthly payments reduce, which can be a negative for investors seeking consistent income. The maturity period is seven years from the date of investment, with the option of withdrawing early for senior citizens. The bonds are not tradeable and non-transferable.

The interest rate on RBI floating rate bonds was last changed on January 1, 2023, when the NSC interest rate was raised for the January-March 2023 quarter. NSC has been steadily increasing before coming to a halt in the current quarter.

In contrast to NSC, which is evaluated every quarter, the interest rate on RBI savings bonds is revised every six months. The next rate review for RBI floating-rate bonds is now scheduled for January 1, 2024. Thus, if the government increases the interest rate on NSC, the interest rate on RBI savings bonds will alter appropriately.

How are Floating Rate Bonds’ Interest Rates Determined?

Because the subscription period for the RBI’s floating rate bonds began on July 1, 2020, the interest rate for the bond’s first coupon payment, due on January 1, 2021, was set at 7.15%. It was determined by adding a premium of 0.35% to the existing NSC rate, which was 6.80% on July 1, 2020, and has remained unchanged since then. 

The government reviews the interest rate on NSC every quarter. The government determines the NSC interest rate following the methodology proposed by the Shyamala Gopinath Committee. According to the Committee’s calculation, the interest rate on various schemes should be 0.25-1% greater than the yields on government bonds of comparable maturity.

Features of the RBI’s Floating Rate Savings Bonds (Taxable)

The variable rate bonds were issued in place of the previously withdrawn 7.75% taxable bonds by the RBI. According to the scheme notification, the freshly issued bonds have the following characteristics:

  • Both residents and Hindu Undivided Families (HUFs) may purchase these bonds.
  • The minimum investment in these bonds is Rs 1,000, with no maximum value.
  • The bonds have a fixed seven-year term. Individual investors aged 60 and up may make premature withdrawals, subject to a minimum lock-in time based on the bond holder’s age.
  • These bonds do not promise to pay interest on a cumulative basis (at the end of the bond’s maturity). Every year, on January 1 and July 1, the interest sum is paid in half.
  • The interest rate on these bonds is reset every six months, on January 1st and July 1st of each year.

The Bottom Line

Eventually, When the government issues bonds with a floating interest rate, those bonds turn into safe investments that pay interest rates that are reasonable. When interest rates are historically low but are expected to rise soon, investors may find it beneficial to diversify their portfolios across various asset classes by purchasing floating-rate bonds. When interest rates are higher, coupon payments will also be higher. As a consequence, investors can invest in these funds for a duration that is tailored to their specific financial objectives, enabling them to develop a more comprehensive financial strategy. 

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