RBI Floating Rate Bonds to offer 7.15% interest from Jan to June 2021

Published: January 1, 2021 at 3:56 pm

Last Updated on January 1, 2021 at 3:56 pm

RBI Floating Rate Bonds were introduced in June 2020 as a replacement for RBI 7.75% bonds (2018) 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. There is no cumulative option.

The interest rate for these bonds would reset every six months. The first reset is today, 1st Jan 2021. The bonds would offer a rate benchmarked to the National Saving Certificate (NSC). The interest rate would be  35 basis points over the respective NSC rate. Since the NSC rate is currently fixed at 6.8%, these bonds would offer 0.35% more = 7.15%

Features of these bonds investors should be aware of: 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 tenure of the bonds? Seven years from the date of issue. Premature redemption shall be allowed for specified categories of senior citizens

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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?  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

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 taxable? Happily. As per slab.

Floating Rate Savings Bonds 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? 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.

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