RBI Floating Rate Bonds: Key Facts

In a rising interest rate environment many savers feel stuck in fixed deposits. The rate they locked in last year can look low today. This is where the Reserve Bank of India product often called the RBI floating rate bond can play a role in the bond market. It gives you the comfort of a government backed instrument with an interest rate that moves with a benchmark.

In simple words a floating rate bond rbi is a savings bond issued by the Government of India where the interest rate is not fixed for the full tenure. The coupon is linked to a reference rate such as the yield or rate on a popular small savings product or a government security. At regular intervals the Reserve Bank resets the coupon based on that benchmark and publishes the new rate.

The structure is straightforward for most investors. You invest a lump sum. The bond has a fixed maturity period which is usually several years. Interest is paid out at regular intervals normally every six months into your bank account. At maturity the government repays the face value. Your principal is therefore linked to sovereign risk which most retail investors see as the safest in rupees.

The key feature is the reset of the coupon. Unlike a fixed rate bond where the interest stays the same from start to finish this bond adjusts the coupon on each reset date. If the benchmark rate in the economy has moved up since the last reset your new coupon will also move up as per the notified formula. If the benchmark has moved down the coupon will be revised lower.

This design gives one important benefit. It reduces interest rate risk. In a fixed rate bond when market rates rise the price of your old bond falls because it is paying a lower rate than new issues. With a floating rate bond rbi the coupon itself is updated so the market value tends to be more stable. For long term savers who worry about being locked into an outdated rate this can feel more comfortable.

There are some points you must know before you invest.

First these bonds are usually not traded on the stock exchange. You cannot buy and sell them freely in the secondary bond market in the way you might trade listed corporate bonds. Once you invest you are expected to hold till maturity. There may be early encashment options for senior citizens after a minimum holding period but these come with specific conditions and sometimes a small penalty on interest.

Second interest from these bonds is taxable. It is added to your income and taxed at your slab rate under current rules. There is no special tax free status. You should look at the post tax return rather than the headline coupon while deciding how much to allocate.

Third there is still reinvestment risk. The rate can move up or down over time. If the economy moves into a phase of falling interest rates the coupon on your bond will decline on each reset. You are protected when rates rise but you do not enjoy the full benefit of locking in a high rate for many years if rates later fall.

Investing is operationally simple. You can apply through designated banks or branches of the Reserve Bank using net banking or physical forms. The bond is usually issued in demat or bond ledger account form and interest is credited directly to your bank account. Minimum investment is small enough for retail savers and there is usually no upper ceiling for individuals.

For many Indian households these bonds work best as part of the fixed income bucket alongside deposits and high quality corporate bonds. They are not the highest yielding option in the bond market but they offer a mix of sovereign backing and an interest rate that keeps some connection with changing conditions. If you understand how the rate resets and are comfortable holding to maturity they can be a useful stabilising piece in a long term portfolio.