Do you think this is a good time to buy RBI Flexible Rate Savings Bonds?

 Do you think this is a good time to buy RBI Flexible Rate Savings Bonds?

Investors should keep in mind that rates will probably decline at some time over the bonds' seven-year life even if they are now rising.

If there are no additional adjustments to the interest earned on modest savings schemes in the coming few months, investors in the RBI's Fixed Rate Savings Bonds (FRSBs) can take advantage of yields above 8%.

Returns on a variety of debt instruments have generally grown over the previous year as a result of the Reserve Bank of India raising the policy repo rate.

Rates will soon surpass 8%

FRSBs have nearly zero credit risk because to the state guarantee. These bonds' interest rates are variable, just like many other government initiatives. They are normally 35 basis points more expensive and match with those of the National Savings Certificate (NSC). In addition, while bond rates are examined and changed every six months, NSC rates are evaluated every three.

At the restart in December 2022, the suspended bond rates were increased to 7.35 percent. For the period of January through June 2023, FRSB rates were fixed at 7.35 percent, which included the then-current NSC rate of 7 percent and the 35 basis point spread.

The NSC rate was increased to 7.70 percent in April. Taking into consideration the addition of 35 basis points to the most recent NSC rate of 7.70 percent, the FRSB rates are expected to be hiked to 8.05 percent for the period of July through December when they are reviewed in July.

FRSB investments worthwhile?

The percentage of 8% is a kind of psychological threshold at which returns on debt instruments start to look appealing to the majority of Indian investors. Except for the Employees Provident Fund, which is only available to those who are salaried and is required for senior citizens and has an 8.2 percent interest rate, that there are not any other choices for non-senior citizens that offer debt at an interest rate of 8 percent or additional funds.

Remember that these are termed floating rate bonds since the rates are not fixed, even though FRSB rates are expected to cross 8%. Every six months, the prices on these debts are reset. Therefore, despite the bond's seven-year term, you cannot lock in the rate or receive stable interest for the full time period.

Bond rates are likely to decline at some time over the seven-year tenure if they are currently rising. The present interest rates, which are only valid for the following six months, should not be used as the basis for any investment choice in FRSB. Additionally, one should think about potential rate changes in the future as well as other investment strategies.

NSC rates are typically 25 basis points more expensive than the typical yields on the five-year G-Sec market. However, this formula may not always be used by the government to decide the tariffs. Therefore, FRSB rates will change in accordance with a 35 basis point spread if NSC rates are not changed upward or are reduced.

NSC rates have fluctuated between 6.80 percent and 8 percent from FY18 through FY23.

What therefore ought investors to do?

Here are some things to remember:

FRSB interest income is wholly taxed. Therefore, those with lower tax brackets can benefit from this.

These bonds don't have a cumulative option, thus they might not be a good choice for people looking for suitable debt solutions who are still in the accumulation phase.

Senior folks have more possibilities with the Pradhan Mantri Vaya Vandana Yojana (if funded before March 31, 2023, with an earnings lock-in of 10 years) and the Savings Scheme for Seniors (8.2 percent interest kept in for five years). Only then should FRSBs be taken into consideration when PMVVY, SCSS, and the Monthly Income Scheme at the Post Office have been exhausted.

For non-senior citizens, FRSB may be an alternative to POMIS because the interest is paid every six months, in January and July.