Can RBI's floating-rate bond improve your debt returns?

The bond offers an 8.05% interest rate and sovereign backing, but cannot be traded or sold on any exchange

- Jash Kriplani

With fixed deposit (FD) rates softening after the Reserve Bank of India's (RBI) recent rate cuts, debt investors are left with fewer ways to optimize returns without compromising on safety.

One instrument worth considering in this scenario is the RBI floating rate savings bond (FRSB), which currently offers 8.05% per annum and comes with the comfort of sovereign credit quality.

How does it work?

The FRSB is issued by the RBI on behalf of the government of India. You don't need a demat account to invest; you can buy it from a bank or the RBI's Retail Direct platform.

Its interest rate is linked to the National Savings Certificate (NSC) rate, with an additional 0.35% spread. The NSC currently offers 7.7%, pegging the FRSB's interest rate at 8.05%. The rate is reset every six months, depending on changes in the NSC rate, though the 0.35% spread remains fixed.

Historically, the NSC has not seen steep cuts, and the lowest FRSB coupon since launch has been 7.15%. As Vidya Bala, co-founder of Primeinvestor.in, said, "Although it is a floating-rate instrument, the rates have largely remained reasonable, even in times when interest rates have fallen."

Interest is paid semi-annually. For example, on a ₹10 lakh investment at current rates, you'd receive a half-yearly payout of ₹40,250, which would total about ₹5.63 lakh over the seven-year lock-in. The payouts are made on 1 January and 1 July every year.

What about liquidity?