Earn high regular returns with RBI Floating Rate Bond

07 Mar 2021|

2 min read |

by ICICI Securities Team

An astute investor will never keep her money in one place. One safe place to park your money would be government bonds like the Reserve Bank of India's floating rate bond issued in 2020.

What is a floating rate bond?

Government agencies and companies issue bonds when they need a loan. Rather than approach a bank, they collect money from the investors who buy their bonds. In exchange for this capital, the bond issuer pays interest in the form of a coupon. It is the annual interest paid to the bondholder.

Most bonds have a fixed coupon rate which remains unchanged until maturity. But there are also bonds with floating interest rates. When you invest in a floating rate bond, keep in mind that the coupon payment will change periodically. That’s because the coupon rate on these bonds fluctuates based on the interest rate of its benchmark.

Key features of RBI floating rate bonds 2020

As the government's banker, the RBI frequently issues bonds on behalf of the Government of India (GOI). But it can also raise money for its operations. Are you in the market to buy RBI bonds? One option you could consider is the central bank’s 2020 issue of floating rate savings bonds. Here’s what you need to know about this RBI saving bond:

The coupon rate and payment: The interest in these RBI bonds is linked to the prevailing interest rate for the National Savings Certificate (NSC). This rate can change every six months. The rate for the RBI saving bond is 35 basis points above the NSC rate. As of 1 January 2021, the NSC rate is 6.8%. So, the rate on the RBI floating rate bond will be 6.8% + 0.35% = 7.15%. The interest is payable every six months and provides a regular income. However, the government could reset the coupon rate after each coupon payment.

Lock-in period: These floating-rate savings bonds from the RBI have a lock-in period of seven years. However, there is some relaxation for senior citizens who buy these bonds:
- Investors aged between 60 and 70 years may encash the bond after six years.
- Those aged between 70 and 80 years may encash the bond after five years.
- Those aged above 80 years may encash the bond after four years.

https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=50896

Transferable to nominee: Although you cannot trade these bonds on an exchange, you can transfer them to a nominee following the bondholder's death. The transfer process is automatically provided you register the nominee.
Tax treatment: The returns on these bonds are taxable. Any gains from these RBI taxable bonds will be taxed as a part of your overall income. The tax rate will depend on the income tax slab that applies to you.

RBI floating rate bonds: Possibility of higher returns

This floating rate bond from the RBI can be a valuable addition to your investment mix. It is a low-risk investment and has the potential to bring higher returns. A look at the benefits of this RBI taxable bond will make things clear.

Earn more than with other investment products: The RBI floating rate savings bond has a relatively high-interest rate of 7.15%. When fixed deposit rates at banks have dipped below 6%, the RBI bond brings significantly higher interest earnings. Plus, it will always remain 0.35% more lucrative than its benchmark—the NSC.

Possible gains if interest rates rise: Say, you invest in fixed-rate bonds and the interest rate for lending increases. Since your coupon rate remains fixed, your overall estimated returns could decline. A floating-rate bond mitigates this interest rate risk as the coupon rate keeps pace with the changing rates.

Zero risks of default: This GOI bond comes with a sovereign guarantee from the Union Government. Your investment is secure, especially compared to corporate bonds.

How to invest in RBI floating-rate bonds

Any resident Indian can buy these RBI floating rate savings bonds. However, the scheme is not available to non-resident Indians (NRIs). You can buy these bonds from ICICI Direct. You can invest online in cash (only up to Rs 20,000) and via demand draft or cheque. You can hold these bonds in the demat form.

Last but not least

Upgrade your bond investments by opening a demat account [LINK] and a trading account with a trusted broker like ICICI Direct. Use their expertise and research to navigate the bond markets. Give your investment plans the necessary boost.

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