Are RBI floating rate bonds the best option as FD rates plummet?
Mumbai:
Risk-averse savers
are increasingly turning to the
Reserve Bank of India
's (RBI)
floating rate savings bonds
, which promise annual yields of up to 8.05% for a 7-year tenure, as fixed deposit rates head south quickly amid modest credit growth, ample liquidity, and expectations of further policy rate reductions.
"Corporate and bank deposit rates have come down in line after the rate cuts announced by RBI," said Anup Bhaiya, MD and CEO, Money Honey Financial - a Mumbai-based distributor. "However, since the RBI floating rate deposit rates continue to be unchanged at 8.05%, there is higher demand for these deposits from retail investors."
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These bonds, issued by the central bank on behalf of the government, come with high safety and pay a 35-basis-point mark-up over the returns promised by the National Savings Certificate.
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Are RBI floating rate bonds the best option as FD rates plummet?
Investors are showing increased interest in the Reserve Bank of India's floating rate savings bonds. These bonds offer annual yields up to 8.05% for a seven-year term. Fixed deposit rates are declining, making these bonds attractive. The bonds provide a 35-basis-point markup over the National Savings Certificate. While safe, they lack liquidity and cannot be prematurely withdrawn.
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That works out currently to 8.05% and has a tenure of seven years, with interest paid once every six months. This interest rate could also change once every six months, and the interest income is taxable for the investor.
Liquidity Challenges
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To be sure, these bonds, although sovereign backed, do not have a liquid market, and investors need to hold them until maturity.
"There is no premature withdrawal option, and these bonds cannot be used as a collateral for borrowing, and hence, investors must be sure to buy and hold them until maturity," said Harshvardhan Roongta, CEO, Roongta Securities.
The minimum investment is ₹1,000 and there is no upper limit on investments in these bonds.
Distributors said both deposit-taking non-bank lenders and banks have slashed rates by 25 to 100 basis points after RBI reduced the policy rate by a cumulative 50 basis points since February.
The 10-year benchmark yields investors 6.22%.
After the rate cuts,
Bajaj Finance
that has a AAA rating pays 7.25% for a 24-60 month deposit, while
SBI
pays 6.3% for a deposit between 5 and 10 years. Senior citizens could earn 50-100 basis points more.
Investors can log on to the RBI retail direct website to buy these bonds, or can buy them from a distributor or private bank websites easily. "These bonds help you earn a lucrative 180 basis points over the 10-year benchmark government bond, while over fixed deposits and corporate deposits these bonds help you earn around 65-150 basis points more," said Vikram Dalal, managing director, Synergy Capital.
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