The Reserve Bank of India (RBI) has hiked repo rates — the rate at which the central bank lends money to lenders — consecutively in the last three polices. While an impact can be seen some of the deposits, the same has not happened for the Floating Rate Savings Bond (FRSB).
RBI has kept the coupon rate on FRSB 2020 (T) for the period July 1, 2022, to December 31, 2022, and payable on January 1, 2023, unchanged at 7.15 percent (6.80 percent+0.35 percent).
Given that, investors must be wondering if these floating rate bonds are still a valuable addition to their portfolio?
We will try to get a clear answer to this.
But first, let’s understand floating rate savings bonds
The Government of India launched the Floating Rate Savings Bonds (Taxable) scheme on July 01, 2020 to enable Resident Indians/HUF to invest in a taxable bond, without any monetary ceiling.
The interest rate of these bonds is linked to that of National Saving Certificates (NSCs). They offer 35 basis points (bps) more than NSCs. The prevailing rate of NSCs is 6.8 percent, so the RBI floating rate bonds are offering 7.15 percent.
Is any interest rate revision expected?
Any revision in the interest rates will only happen after the RBI’s December policy, said Adhil Shetty, Chief Executive Officer (CEO), Bankbazaar while speaking to CNBC-TV18.com.
“The market dynamics concerning interest rates have seen an uptick, and there are expectations that the apex bank may revise the interest rate next year,” he told CNBC-TV18.
So, what should investors do?
Those who have already invested or are planning to invest, will not see much difference until this year. They will earn 7.15 percent until there is any RBI revision in the interest rate.
However, this is a relatively higher interest rate than other risk-free fixed investment products, Shetty said
"It is lucrative as this investment earns a higher interest rate than regular fixed deposits and NSC. Investors are always going to get 0.35 percent more in this scheme," he said.
He further said that floating rate bonds have a variable interest rate linked to a predetermined benchmark rate and that can be anything ranging from the repo rate, the reverse repo, the average T-Bill rate or small savings schemes. It is reset at regular intervals.
The change in repo rate in India since March 2010 can be summed up as follows:
| Effective Date | Repo Rate | Change |
| 5 August 2022 | 5.40% | 0.5% |
| 8 June 2022 | 4.90% | 0.5% |
| May 2022 | 4.40% | 0.4% |
| 09 Oct 2020 | 4.00% | 0.00% |
| 06 Aug 2020 | 4.00% | 0.00% |
| 22 May 2020 | 4.00% | 0.40% |
| 27 March 2020 | 4.40% | 0.75% |
| 6 February 2020 | 5.15% | 0.25% |
| 07 August, 2019 | 5.40% | 0.35% |
| 06 June, 2019 | 5.75% | 0.25% |
| 04 April, 2019 | 6.00% | 0.25% |
| 07 February, 2019 | 6.25% | 0.25% |
| 01 August, 2018 | 6.50% | 0.25% |
| 06 June, 2018 | 6.25% | 0.25% |
| 02 August, 2017 | 6.00% | 0.25% |
| 04 October, 2016 | 6.25% | 0.25% |
| 05 April, 2016 | 6.50% | 0.25% |
| 29 September, 2015 | 6.75% | 0.50% |
| 02 June, 2015 | 7.25% | 0.25% |
| 04 March, 2015 | 7.50% | 0.25% |
| 15 January, 2015 | 7.75% | 0.25% |
| 28 January, 2014 | 8.00% | -0.25% |
| 29 October, 2013 | 7.75% | -0.25% |
| 20 September, 2013 | 7.50% | -0.25% |
| 03 May, 2013 | 7.25% | -0.50% |
| 17 March, 2011 | 6.75% | -0.25% |
| 25 January, 2011 | 6.50% | -0.25% |
| 02 November, 2010 | 6.25% | -0.25% |
| 16 September, 2010 | 6.00% | -0.25% |
| 27 July, 2010 | 5.75% | -0.25% |
| 02 July, 2010 | 5.50% | -0.25% |
| 20 April, 2010 | 5.25% | -0.25% |
| 19 March, 2010 | 5.00% | -0.25% |
(Source: Bankbazaar)
Since it is less volatile and could be used as an inflation-protected instrument, considering a higher interest rate compared to FDs and other products, it makes sense to invest as a diversification of investment portfolio to match financial goals, Shetty suggested.
