RBI floating rate bonds interest rate hiked to 7.35% from January 1, 2023

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The Reserve Bank of India (RBI) has hiked the interest rate on floating rate savings bonds (2020) to 7.35 per cent from 7.15 per cent earlier. The central bank made the announcement via a press release dated December 30,2022. The hike in interest rate on floating bonds has come after government hiked the interest rate on National Savings Certificate (NSC).
As per the RBI’s press release, “In terms of Para 13 (ii) of Government of India Notification F.No.4(10)- B(W&M)/2020 dated June 26, 2020 on Floating Rate Savings Bonds, 2020 (Taxable)- FRSB 2020 (T), the coupon/interest rate of the bond would be reset half yearly, starting with January 01, 2021 and the coupon/interest rate will be set at a spread of (+) 35 bps over the prevailing National Savings Certificate (NSC) rate. The rate of interest on NSC has been revised to 7.00% for the fourth quarter of FY 2022-23, in terms of GoI notification F.No. 1/4/2019 – NS dated December 30, 2022. Accordingly, the coupon rate on FRSB 2020 (T) for period January 1, 2023 to June 30, 2023 and payable on July 1, 2023 has been reset at 7.35% (7%+0.35%= 7.35%).”

The interest rate on these floating bonds is linked to rate of NSC. These floating rate bonds will earn 0.35% above the prevailing NSC rate, as per the scheme guidelines issued on June 26, 2020.

After the small savings interest rate hike, the NSC will fetch 7% for January-March quarter of financial year 2022-23, up from 6.8% it earned during the previous quarter. There is an increase of 0.2% in the NSC interest rate. The RBI floating rate bonds will see the same interest rate hike as seen by the NSC.

How interest rate is arrived at for floating rate bonds

As the subscription of RBI’s floating rate bonds were made available from 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 the formula suggested by the Shyamala Gopinath Committee. As per the formula suggested by the Committee, the interest rate on different schemes should be 0.25-1% higher than the yields of the government bonds of similar maturity.

Features of RBI’s Floating Rate Savings Bonds, 2020 (Taxable)

RBI launched the floating rate bonds in lieu of the earlier withdrawn 7.75% taxable bonds. As per the scheme notification, the features of the newly 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 start at 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 to pay interest on cumulative basis (at the end of the maturity of the bonds). The interest amount is paid out half-yearly on January 1 and July 1 every year.

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

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