“Investors booking profits in metals and equities after the sharp rally are shifting money into fixed income, which is boosting demand for these bonds,” says Anup Bhaiya, MD and CEO, Money Honey Financial Services.
RBI Floating Rate Bonds currently offer 8.05%, which is 100-200 basis points higher than State Bank of India’s 5-10 year fixed deposit rate of 6.05% and 150 basis points more than the 10-year benchmark G-Sec yield of 6.52%.
The bond’s returns are linked to the National Savings Certificate (NSC). RBI Floating Rate Bond offers the NSC interest rate plus 35 basis points. This means the returns from this instrument move on the basis of NSC interest rates.
Agenciesa safe bet which can also be used as a hedge
Over the past decade, NSC rates have moved in a broadly moved in range of 6.8% to 8.5%. It fell between 2019 and 2021 and then inched up again.
RBI Floating Rate Bonds carry a seven-year tenure, pay interest semi-annually, and offer no cumulative option, while the interest income is taxable at slab rates. The minimum investment is ₹1,000, with no upper limit. These bonds can be bought on the RBI Retail Direct website, through select private-sector bank platforms, or via financial product distributors. “They serve as a strong long-term anchor in the debt portion of a portfolio,” says Aditya Agarwal, co-founder of Wealthy.in. Some wealth managers note that sophisticated investors also use these instruments to hedge against rising interest rates.
“If interest rates go up, the coupon on floating rate bonds also increases. This protects rich investors from the price erosion seen in fixed-rate bonds when rates rise,” says Suresh Darak, founder, Bondbazaar.in. Darak believes that adding this floating-rate bond helps balance a debt portfolio heavily invested in fixed-rate instruments.
