RBI's 8.05% Floating-Rate Bond: A smarter alternative to bank FDs?

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As banks trim their FD interest rates following RBI rate cuts, conservative investors are losing yield on their deposits. In this climate, the RBI’s Floating Rate Savings Bond (FRSB)—with its sovereign backing and current yield of 8.05%—stands out as one of the most appealing safe-return options available today.

How does the interest rate actually work?

The coupon rate on FRSB is linked dynamically to the market rate of NSC plus a spread of 0.35%. Since NSC now offers 7.7%, FRSB offers 8.05%. This six-monthly reset rate gives some protection in regimes of unstable rates.

The liquidity trade-off

There is a trade-off. FRSBs provide decent return and safety but at the expense of a seven year tie in for most investors. Pensioners, however, can withdraw between four and six years according to age, albeit penalised. There is no trading and no access to collateral over the term.

How do FD rates stack up?

The majority of bank FDs now offer interest in the ballpark of 6-7%, even for 5-10-year tenures. The small finance banks do pay higher—up to 9% on some of them—but a number of those are below the FRSB yield too and lack corresponding government assurance.

When the bond dazzles—and when FDs dominate

The FRSB is most attractive to conservative investors seeking government-guaranteed, half-yearly returns with decent yields. But those who desire absolute freedom—like the ability to withdraw at one's whim—might use FDs or small finance bank products, although these give lower or uncertain rates.

FAQs

Can I withdraw the RBI floating-rate bond before seven years?

Only senior citizens have early exit facilities—but with fees. Those below 60 years of age need to stay invested through the entire 7 years.

How tax-deductible is the interest on these bonds?

Interest is fully taxable based on your tax slab. Tax deducted at source if aggregate interest is over ₹10,000 in a year.

Can FD rates surpass the FRSB's 8.05%?

Some small finance banks have higher FDs even up to 8%, but these typically come with limitations such as cap on deposits or lower security than RBI bonds.