The Indian government issues a special type of bond called floating rate bonds (FRB) which matures in 2034.
Sunaina Chadha NEW DELHI
The Reserve Bank of India (RBI) has announced an interest rate of 8% on Floating Rate Savings Bond (FRSB) 2034. This is a floating rate bond and the interest rate will be reset every six months.
Here’s what that means:
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The Indian government issues a special type of bond called floating rate bonds (FRB) which matures in 2034.
Interest Rate Changes: Unlike regular bonds with a fixed interest rate, the interest rate on this bond will adjust every six months.
How the rate is set: The interest rate is based on the average yield of recent auctions of short-term government debt securities (called Treasury bills). Basically, it changes with market conditions.
Current Rate: For the next six months (April 30, 2024 to October 29, 2024), the interest rate of this FRB bond will be 8%.
Additional Details:
This 8% rate is calculated by taking the average of the interest rates from the three previous short-term public debt auctions, plus a small additional fixed amount (0.98%).
These FRB bonds can be a good option for investors who want an interest rate that reflects current market conditions.
FRBs have a maturity period of seven years. The minimum investment amount for FRBs is Rs 1,000, while there is no maximum limit. FRBs are backed by the Indian government, making them one of the safest investments.
Interest on these bonds is paid semi-annually on January 1 and July 1 of each year, with no provision for the payment of cumulative interest.
Investors purchase floating rate bonds because of their flexibility to reflect the current market interest rate. If the interest rate of the benchmark increases, the interest rate payable for the floating rate bond also increases.
Such bonds make sense in a rising rate environment.
“These bonds are suitable for conservative investors who are looking for assured returns from a lump sum investment. Not suitable for investors who can assume some risk by investing in equity-linked investments, which can generate much higher returns. Alternatives can be (i) Balanced mutual insurance (for those who can bear risk), (ii) fixed deposits from banks, although the rate of return is lower, and (iii) corporate deposits,” Value said Research in a note.
Your capital in variable rate bonds is fully protected. However, there is no inflation protection, meaning that whenever inflation is higher than the latest interest rate, the deposit earns no real return. However, when inflation is lower than the current interest rate, the real rate of return is positive.
Additionally, these bonds are not listed or traded and you cannot take out a loan on them. “You are effectively immobilized for a period of seven years. However, early withdrawals are authorized with a penalty for seniors after a minimum blocking period, which varies from four to six years depending on the age group in which the person elderly falls,” noted Value Research.
