Summary of this article
RBI announced 6.52 per cent on floating rate bond 2031
Learn how floating rate bonds work and how investors can invest in one
The Reserve Bank of India last week announced the rate of interest for a government floating rate bond (FRB) maturing in 2031. The rate of interest for the bond, which the central bank said is applicable for six months, starting from December 7 to June 6, 2026, was marked at an interest rate of 6.52 per cent per annum.
The coupon for FRB maturing in 2031 is determined according to the base rate equivalent to the average of weighted average yields of 182-day Treasury bills (T-bills) plus one per cent. The average for yields of 182-day T-bills is considered for the previous three auctions till December 7. The revised rate of interest will be applicable to all holdings of the FRB 2031 bond during the six months announced.
What are FRBs?
FRBs are debt instruments with a variable interest rate which is adjusted periodically. These periodic adjustments could take place every three months, six months, or a year in accordance with the adjustment cycle mentioned at the time when the bond is issued. These adjustments on the rate of interest are backed with a benchmark rate, for example, the repo rate, yields of a T-bill, the overnight Mumbai Interbank Offered Rate, etc. This is added with a fixed yield spread specified at the time of issuance.
In the case of FRB 2031, the calculation for the interest rate is as follows:
(Weighted Average Yield of last 3 auctions of 182-day T-bills) + 1% (fixed spread)
FRBs operate by linking the interest rate payments to the movement in a benchmark rate specified. Accordingly, if there is a rise in yields or interest rates of the benchmark rate, the coupon of the bond also rises. This mechanism provides the bondholder the flexibility to obtain returns in accordance with the trends in the market. This offers the bondholder protection against inflation and volatility in interest rates. However, it is also important to note that in case yields of the benchmark rate fall, the interest rate of the coupon also takes a hit. These kinds of bonds help diversify and balance portfolios of investors looking to invest in debt securities.
The key difference between a fixed-rate bond and an FRB is the interest rate fixing. Interest rates on FRBs follow a cyclical readjustment in the coupon payments according to the fixed benchmark rates. Meanwhile, for fixed-rate bonds, the coupon is fixed by the market at the time of issuance of the bond at a par value. The coupon repayment of a fixed-coupon bond does not change till maturity. However, for traders buying the bond in the secondary market after the issuance of the bond, bond prices and yields will be determined in accordance with the market volatility and sentiments, allowing investors to adjust these fixed-rate bonds in their portfolio.
How to invest in an FRB?
Investors can buy an FRB through the RBI’s online retail direct portal. These bonds are also listed on the exchanges. Online bond platforms registered with the Securities and Exchange Board of India also offer FRBs where investors can buy or sell these bonds.
