RBI Floating Rate Savings Bonds 2020: Should you buy?

The RBI 7.75% bonds (2018) have been replaced by RBI Floating Rate Savings Bonds 2020 according to a Finance Ministry announcement. We look at its features and discuss who should buy it and when.

What are Floating Rate Savings Bonds 2020? A floating-rate bond has a variable interest rate, unlike a fixed-rate bond. When interest rates increase,  the interest payout increases and vice-versa. In a fixed-rate bond, the coupon rate is constant the value of the bond (for those who wish to sell mid-term) would vary as per market forces. In a floating rate bond, the current market price of the bond is quite close to its face value (Rs. 1000 above), but the interest rate payments will change with rate movements. Debt mutual funds use these bonds to lower interest rate sensitivity of the NAV: How Floating Rate Debt Mutual Funds Reduce Interest Rate Risk

What is the interest rate of Floating Rate Savings Bonds 2020? The initial coupon rate is 7.15%. The Interest rate for next half-year will be reset every six months, the first reset being on January 01, 2021.

What is the benchmark? Prevailing National Saving Certificate (NSC) rate with a spread of 35 basis points over the respective NSC rate.

What is the tenure of the bonds? Seven years from the date of issue. Premature redemption shall be allowed for specified categories of senior citizens

Who can buy these bonds?  The bonds can be held individually or jointly by resident Indians; on behalf of a minor as father/mother/legal guardian; HUF. NRIs cannot invest.

Is there a cumulative option for Floating Rate Savings Bonds 2020?  No. The interest on the bonds is payable semi-annually on 1st Jan and 1st July every year.

Is the bond tradable? No.

How to buy? Via State Bank of India and other nationalised banks, as well as four private sector banks

When will the bonds become available? Will be announced shortly by the RBI

Is a floating rate bond better than fixed-rate bond?  In general no. If the rates fall, the issuer benefits. If the rates increase, the buyer benefits. The effective yield due to this premium (possibility of higher coupon rate) would be lower in a floating rate bond.

Is the interest from Floating Rate Savings Bonds 2020 taxable? Happily. As per slab.

Floating Rate Savings Bonds 2020 vs tax-free bonds? Considering the high cost of the tax-free bonds in the secondary market – see: Tax-free bond vs RBI 7.75% bonds: Which is better? – the floating rate bonds are a better bet.

Who should buy Floating Rate Savings Bonds 2020? Only those who need income. Since there is no cumulative option, it cannot be used as a 7 year FD. However note that, although we may be close to the bottom of the interest rate trough and rates are expected to increase soon (when economic activity revives), over seven years, there could be one more rate drops. So these are not a source of “regular” income.

Under the present circumstances, these bonds are a reasonable bet for those looking for a secure income. They can also be used by senior citizens provided they have the necessary liquidity.