Interest On Floating Rate Bond Will Be 7.69% : RBI
The Reserve Bank of India(RBI) has stated that the rate of interest on Government of India Floating Rate Bond 2028 (GOI FRB 2028) will be 7.69 per cent per annum.
These rates will be applicable for the half of the year from 4 October 2023 to 3 April 2024.
FRB 2028 carries a coupon which has a base rate equivalent to the average of the Weighted Average Yield (WAY) of last three auctions (from the rate fixing day i.e., 4 October, 2023) of 182 Day T-Bills, plus a fixed spread (0.64 per cent).
What Are Floating Rate Bonds?
A floating rate bond is a debt instrument that does not have a fixed coupon rate, but its interest rate fluctuates based on the benchmark the bond is drawn.
Benchmarks are market instruments that influence the overall economy. For example, repo rate or reverse repo rate can be set as benchmarks for a floating rate bond.
How Do Floating Rate Bonds Work?
Floating rate bonds make up a significant part of the Indian bond market and are majorly issued by the government.
For example, the RBI issued a floating rate bond in 2020 with interest payable every six months. After six months, the interest rate is re-fixed by the RBI. The benchmark for the floating rate bond is 35 points higher than the prevailing National Saving Certificate (NSC) interest rate.
The current interest rate for the National Savings Certificate is 6.8 per cent. Hence, the interest rate for the RBI’s floating rate bond is 6.8 per cent + 0.35 per cent= 7.15 per cent.
Generally, a floating rate bond is issued by the government, financial institutions, and corporations with two to five years of maturity. Depending on a floating bond rate, its interest payable time may be quarterly, semi-annually, or annually.
