Indeed, the interest rate of these bonds is linked to that of the National Savings Card (NSC). These floating bonds will rise to 0.35% above the prevailing NSC rate, in accordance with program guidelines issued on June 26, 2020.
This relieves fixed income investors, especially the elderly, as there are currently only three investment options with returns above 7%: RBI floating rate bonds with an interest rate of 7, 15%, the Senior Citizens Savings Scheme at 7.4%, and the Pradhan Mantri Vaya Vandana Yojana with a guaranteed return of 7.4%.
Interest rates on Fixed Deposits (FDs), a fixed income instrument that many seniors depend on for regular income, have been cut mercilessly by banks over the past two years. This is thanks to the RBI which has reduced the repo rate by 250 basis points or 2.5% since February 2019.
Currently, the State Bank of India (SBI) offers interest rates in the range of 5.6-6.2% for FD mandates between two years and 10 years for seniors.
How the Interest Rate is Fixed for RBI Floating Rate Bonds
The subscription of these bonds having been opened on July 1, 2020, the interest rate of the first coupon payment of the bond, maturing on January 1, 2021, was set at 7.15%. It was obtained by adding a premium of 0.35% to the prevailing NSC rate, which was 6.80% as of July 1, 2020 and has remained unchanged since then.
The interest rate on the NSC is revised by the government on a quarterly basis. The government arrives at the NSC interest rate using a formula suggested by the Shyamala Gopinath committee. According to the formula suggested by the Committee, the interest rate on small savings plans should be 0.25 to 1% higher than the yields on government bonds of similar maturity.
Characteristics of RBI Floating Rate Bonds
RBI launched the floating rate bonds instead of the earlier 7.75% taxable bonds which were retired. In accordance with the scheme notification, the characteristics of the recently launched bonds are as follows:
a) Hindu Residents and Undivided Families (HUF) can invest in these bonds.
b) The minimum investment in these bonds is Rs 1,000 with no maximum amount limit.
c) The bonds have a fixed term of seven years. Early withdrawals are permitted for individual investors aged 60 and over, subject to a minimum lock-in period depending on the age of the bond holder.
d) These bonds do not offer any cumulative interest option (payment of interest at the end of the bond maturity period). The amount of interest is paid semi-annually on January 1 and July 1 of each year.
e) The interest rate on these bonds is reset every six months, on January 1 and July 1 of each year.