Looking For Better Returns Than FD? RBI Announces 8.10% Interest on FRB 2034

The Reserve Bank of India (RBI) on October 27, 2023, announced an annual interest rate of 8.10 per cent on the Government of India Floating Rate Bond 2034 (GOI FRB 2034) for the period from October 30, 2023, to April 29, 2024. The coupon rate is determined by the Weighted Average Yield from the last three auctions of 182-day T-Bills, with an added fixed spread of 0.98 per cent.

What Are Floating Rate Bonds?

Floating Rate Bonds are securities that do not have a fixed coupon rate. Instead, their coupon rate is variable, adjusting in 6 months. The benchmark rate used to determine the coupon can vary, including the repo rate, reverse repo rate, average T-Bill rate, and savings scheme interest rate. Regarding the GOI FRB 2034, the rate is based on T-Bills (Treasury bills)

Investment Considerations

Says Ajay Pruthi, a Sebi RIA and founder of PLNR, “Young investors in higher tax brackets, during their accumulation phase, should consider prioritising bonds exposure through gilt funds once they have utilised their investments in tax-free instruments like PPF (Public Provident Fund), VPF (Voluntary Provident Fund), Sukanya Samriddhi Scheme, etc. This is preferable over investing in RBI floating rate bonds or fixed deposits (FDs).”

Pruthi adds, “Senior citizens seeking a steady income may find the Senior Citizen Savings Scheme (SCSS) more appealing. This scheme offers a higher interest rate of 8.20 per cent, which remains fixed for five years."

Comparing With FDs

Compared to fixed deposits, the interest rate on these floating-rate bonds is slightly higher. For instance, one of the highest interest rates on FDs, currently offered by IDFC First Bank, is 7.5 per cent for a one to two-year tenure. Bank of Baroda offers a 7.25 per cent interest rate on a 2-3 year FD, with senior citizens enjoying an additional 50 basis points.

Pruthi suggests that while RBI floating rate bonds’ interest rates look enticing, rates could be revised downwards in the next review cycle if inflation remains under control or decreases. “For those seeking a guaranteed fixed interest rate, FDs are the safer option, while RBI floating rate bonds are a suitable choice if you are comfortable with some uncertainty and anticipate interest rates rising in the future,” he adds.

Stability and Benchmark Yield

Data from CEIC reveals that the yield on 182 Day T-bills (benchmark of FRB 2034) rose from 6.8 per cent in July 2023 to 7 per cent in September 2023. They peaked at 7.2 per cent in March 2023. FRBs are generally less volatile than other fixed-income instruments and are considered safe investments due to their government backing and minimal credit risk.

Sriram Jayaraman, a Securities and Exchange Board of India (Sebi)-registered investment adviser, also recommends FRB bonds as a secure investment option for those seeking income. “Senior citizens can consider investing in this along with SCSS. SCSS has a limit of 30 lakh, while RBI bonds have no such limit. One must remember that interest rates can change once every six months. However, taxation will be as other income, and there is no tax benefit for the interest received,” Jayaraman says.

As LTCG benefits for investing in floater funds through mutual fund houses are no longer available, purchasing these bonds directly can be considered using the RBI Retail Direct account or the NSE GoBid platform.