RBI Floating Rate Bonds: Should You Invest In These In Volatile Market Conditions?

Amid volatile market conditions, and bank fixed deposit (FD) rates hovering between 6.50 per cent and 7.50 per cent, is the 8.05 per cent rate on the Reserve Bank of India (RBI) Floating Rate Savings Bonds (FRSB) an attractive option? Experts say these are generally defensive investments. They provide sovereign guarantees and inflation-linked returns, and thus, risk-averse investors may consider them amid volatile market conditions.

Notably, the interest rate of these bonds is linked to the deposit rate on National Saving Certificates (NSCs). The rates on these floating-rate bonds are reviewed every six months and are determined by adding a spread of 35 basis points (bps) over the NSC rates.

Saurav Ghosh, co-founder, Jiraaf, an online bond platform provider (OBPP) says: “NSC rates are influenced by the broader interest-rate environment, especially the 10-year government security (G-sec) yield, inflation trends, and monetary policy signals. So, when market yields rise and the government revises small-savings rates upward, floating-rate bond coupons can rise too. When the rate cycle softens, the reset may work in the opposite direction.”

While the RBI cut policy rate (repo rate) by 1.25 per cent over one year, the banks have also reduced their deposit rates. However, the government kept the small savings interest unchanged all this while, keeping NSC rates unchanged, and thus interest on FRSB unchanged at 8.05 per cent.

Says Mohit Bagdi, head - investment research and founding member, MIRA Money: “Many prominent commercial banks are currently offering 5-year FD rates between 6.50 per cent and 7.25 per cent. By choosing the RBI bond, you are earning a premium of roughly 0.80-1.50 per cent over traditional FDs with even higher security.”

Is It The Right Time To Invest In RBI Floating Rate Bonds?

Amid volatile market conditions, geopolitical tension worldwide, falling FD rates, and other economic conditions, FRSB offers guaranteed and inflation-adjusted interest rates.

Adds Ghosh, “For conservative investors, this is a reasonable time to consider RBI Floating Rate Savings Bonds. Since G-sec yields are elevated, there is a probability that NSC rates will be revised upwards in June, which will also translate into higher yields on floating-rate bonds, yielding higher returns to investors.”

However, he added that “this is not a timing-led investment. Its real value lies in capital preservation and regular cash flow, not tactical gains”. He said: “Investors who want safety and are comfortable with a long holding period may find it suitable. For those seeking liquidity or higher return potential, other options may be more appropriate.”

Bagdi adds: “I believe interest rates won't fall significantly in the next 1–2 years; locking in now allows you to enjoy the current high spread.”

Should Seniors Invest In RBI Floating Rate Bonds?

Bagdi said that If a senior citizen has planned for near-term (1-5 years) liquidity, then choosing lock-in safe instruments is still favourable. However, before choosing these floating rate bonds, they should first invest in the Senior Citizen Savings Scheme (SCSS) and utilise the maximum limit of Rs 30 lakh with the current deposit rate of 8.20 per cent. 

“Over and above, choose these floating bonds where 7 years lock-in should not be a constraint on liquidity,” he said.

Two points to be noted here before deciding to invest in FRSBs are: taxation and seven years lock-in. While the lock-in may be a drawback, the floating rate and guaranteed return can compensate for it, but the invested amount, as well as interest on it, remains taxable.

Says Charu Pahuja, CFPCM, group director and COO, Wise Finserv: “RBI Floating Rate Bonds look more attractive than some FDs, but unlike a regular fixed deposit, the FRSB rate does not stay the same for all seven years. Since these bonds are redeemed at face value, there is no capital gain benefit.”

She adds: “FRSBs can be useful if someone wants government-backed security with no investment cap. But they should remember one thing that if interest rates continue to fall, the return on these bonds can also reduce over time. For many people, these bonds can be a sensible part of the portfolio, but not the whole portfolio.”

In short, one may consider FRSB now, considering the interest rates, but must be aware of the interest rate risk and utilise these bonds accordingly in the portfolio.