Source: ET
Context:
With bank deposits and small-savings schemes offering modest returns, risk-averse investors are increasingly turning to RBI Floating Rate Bonds, a government-backed debt instrument with a seven-year lock-in period. These bonds are gaining traction among individuals seeking safer and higher-yielding alternatives.
What are Floating Rate Bonds?
Floating Rate Bonds (FRBs) are debt securities issued by the Reserve Bank of India (RBI) or other entities in which the interest rate is not fixed, but periodically reset based on a benchmark rate.
Unlike fixed-rate bonds, FRBs protect investors from interest rate risk by adjusting the coupon payments according to market conditions.
Key Features
| Feature | Description |
|---|---|
| Issuer | RBI (on behalf of Government of India) or financial institutions. |
| Interest Rate | Linked to a benchmark such as Treasury Bill yield or Government Security (G-Sec) rate. The rate is reset at predetermined intervals (e.g., every 6 months). |
| Tenure | Usually medium to long-term, often ranging from 5 to 10 years. |
| Face Value | ₹1,000 per bond (typical for retail investors), but can vary. |
| Coupon Payment | Periodic interest payment (e.g., semi-annual) that fluctuates with benchmark rate movements. |
| Marketability | Listed on stock exchanges for trading; investors can buy and sell before maturity. |
Types of Floating Rate Bonds by RBI
- RBI Floating Rate Savings Bonds (Retail): Targeted at individual investors; interest is linked to short-term G-Sec rates.
- FRBs for Institutional Investors: Offered to banks, mutual funds, and insurance companies; often in larger denominations and longer tenure.
Advantages
- Protection against interest rate risk: Returns rise when market interest rates increase.
- Predictable benchmark linkage: Transparent and linked to RBI-determined rates.
- Attractive during rising rate scenarios: Investors can earn higher coupons compared to fixed-rate bonds.
Disadvantages
- Lower returns when rates fall: Coupon payments decrease if benchmark rates decline.
- Complexity for small investors: Interest calculations change periodically, making it slightly harder to estimate returns in advance.
- Market price volatility: If sold before maturity, the bond price may fluctuate based on prevailing interest rates.
