RBI floating rate bonds interest rate to remain 7.15% till June 30, 2021

RBI floating rate bonds interest rate to remain 7.15% till June 30, 2021

With the government maintaining status quo on interest rates of small savings schemes for the last quarter of the current fiscal, the Reserve Bank of India’s (RBI) Floating Rate Savings Bonds, 2020 (Taxable) will continue to fetch the same interest rate, i.e., 7.15% till the next reset date of July 1, 2021.

This is because the interest rate on these bonds is linked to that of the National Savings Certificate (NSC). These floating bonds will fetch 0.35% above the prevailing NSC rate, as per the scheme guidelines issued on June 26, 2020.

This comes as a relief for fixed income investors, especially senior citizens, as currently there are only three investment options with returns more than 7%: the RBI floating rate bonds with an interest rate of 7.15%, Senior Citizens Savings Scheme earning 7.4%, and the Pradhan Mantri Vaya Vandana Yojana with an assured return 7.4%.

Interest rates on fixed deposits (FD), a fixed income instrument that many senior citizens depend on for regular income, have been cut mercilessly by banks over the past couple of years. This is thanks to the RBI cutting the repo rate by 250 basis points or 2.5% since February 2019.

Currently, the State Bank of India (SBI) is offering interest rates in the range of 5.6-6.2% for FD tenures between two years and 10 years for senior citizens.

How interest rate is fixed for RBI floating rate bonds
As subscription to these bonds opened on July 1, 2020, the interest rate for the first coupon payment of the bond, due on January 1, 2021, was fixed at 7.15%. It was arrived at by adding a premium of 0.35% to the prevailing NSC rate, which was 6.80% as on July 1, 2020 and kept unchanged since then.

The interest rate on NSC is reviewed by the government every quarter. The government arrives at the NSC interest rate using a formula suggested by the Shyamala Gopinath Committee. As per the formula suggested by the Committee, the interest rate on small savings schemes should be 0.25-1% higher than the yields of government bonds of similar maturity.

Features of RBI floating rate bonds
RBI launched the floating rate bonds in lieu of the earlier 7.75% taxable bonds which were withdrawn. As per the scheme notification, the features of the recently launched bonds are as follows:

a) Resident individuals and Hindu Undivided Families (HUFs) can invest in these bonds.

b) The minimum investment in these bonds is Rs 1,000 with no limit on the maximum amount.

c) The bonds have a fixed tenure of seven years. Premature withdrawals are allowed for individual investors whose age is 60 years and above, subject to minimum lock-in period depending on the age of the bond holder.

d) These bonds do not offer any cumulative (interest payment at the end of the maturity period of the bonds) interest option. The interest amount is paid out half-yearly on January 1 and July 1 every year.

e) The interest rate on these bonds is reset every six months, i.e., on January 1 and July 1 every year.

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