Should you invest in GOI floating rate savings bonds?

Debt investors have been so starved of good returns lately, that any return above 7% now seems like a grand prize. This is why, after the government recently announced an interest rate of 7.7% per annum on National Savings Certificates (NSC) for the April-June 2023 quarter, there was much jubilation. Apart from warranting a fresh look at the NSC itself, this rate hike promises to significantly lift returns on a Central government-backed instrument – GOI Floating Rate Savings Bonds 2020 (GOI FRSB).  

GOI floating rate savings bonds offer interest rates that are at a 35-basis point spread over the prevailing NSC rate, so one can now expect this floating rate bond to offer 8.05% per annum for the July 1- December 31 2023 period, up from 7.35% currently. Given that 8% plus rates from a government-backed instrument, that too for non-senior folks is a rarity, should you max out your investment in these bonds? As this is a floating rate bond, this decision must be based, not on the 8.05% coupon from July 1- December 31, but on how coupons are likely to move in future. 

Should you invest in GoI floating rate savings bonds?


The government of India’s floating rate savings bonds (taxable), were launched in July 2020 as a substitute for the fixed rate 7.75% bonds that were earlier retailed by RBI. The original RBI notification launching FRSBs is here. Here is a brief summary of the bond’s features:

  • Though a form of government borrowings, these bonds do not form part of bond auctions conducted by RBI via the Retail Direct Gilt platform. They are instead sold through leading banks.
  •  These bonds are not held in your demat account and are held separately as online/physical certificates. 
  • GOI FRSBs pay interest at half-yearly intervals in January and July. The interest is taxable at your slab rate and there is no cumulative option. 
  • The rate for each six-month period is fixed at a 35-basis point spread over the interest rate for the 5-year NSC and announced by RBI. 
  • The bonds carry a 7 year lock-in period. They are not listed and not tradeable in the market. Premature withdrawal is not allowed. 

We had written about these bonds soon after their launch and it is also part of some of our portfolios. As rates were plumbing the depths during the early months of Covid and we were concerned about delinquencies hurting banks and NBFCs as the pandemic escalated, we believed FRSBs offered a safe debt option, with good returns. Now that market interest rates are much higher, alternatives offer good returns too and the economy is in a stable state, should you allocate new money to these bonds? Here’s an analysis.  

Not so ‘floating’ 

When GOI floating rate savings bonds were launched in mid-2020, the time was ideal for investing in floating rate bonds, as market interest rates were at rock-bottom and had a high probability of rising from those levels. Without replaying the entire saga of Covid, the Russia-Ukraine war, return of inflation and MPC raising rates, let’s take stock of how market interest rates have moved between July 2020 and now. The table below shows that interest rates in India have climbed steeply by 250-400 basis points.  

In an ideal world, this bonanza in market rates should have meant a nice increase in the returns offered by GOI FRSBs. But that has not quite played out. While the coupon on FRSBs in July 2020 at 7.15% was high relative to market rates, the coupon has remained quite sticky and has not “floated’ up with market rates as it should. It is only recently in  January 2023 that the coupon was revised to 7.35%.   

 How did this transpire? Well, FRSB rates failed to keep up with market interest rates because the instrument to which they are pegged – the NSC rate - did not see any revision in the last couple of years. 

Now according to the government’s own internal guidelines, interest rates on the NSC are supposed to be at a 25 basis point spread over the average market yields of 5 year g-secs, in the months preceding the rate announcement for each quarter. So the NSC interest rate for the January-March quarter of a year is supposed to be at a 25 basis point spread over the average 5 year g-sec yield in the months of September-November the previous year. The rate for April-June is supposed to be at a similar spread over average yields for December-February, and so on. Read this official notification here.

But in practice, though market yields on the 5-year g-sec did rise sharply in the last two years, the Centre for some reason, held the NSC interest rate at 6.8%. While RBI has been religiously setting half-yearly rates on the FRSBs at a 35-basis point spread over NSC rates, these rates haven’t changed much because the underlying NSC rates haven’t budged, until recently. The table below captures how FRSB rates have moved, relative to NSC and average 5 year g-sec yields (for rolling 3 months).

What we can conclude from the above is that even if market yields on 5-year g-secs were to rise sharply, the GOI FRSBs will keep up only if the Centre deems it fit to revise NSC’s interest rates. Yes, in past rate cycles, the NSC has seen its interest rates rise to 8% (2018-19) and even 8.6% (2013-16). But whether the government will be inclined to raise rates that much from here on, escalating its own borrowing costs, is now open to question. 

In fact, we believe that with multiple considerations beyond inflation now weighing on RBI (slow growth, global turmoil, US  banking crisis etc), the MPC is likely to hit the pause button sometime soon, after one or two rate hikes at most. (Read the explanation in our Debt Outlook for 2023. Market yields on g-secs are already reflecting this, with both 10 year and 5-year g-secs finding it tough to break past 7.5% in the last six months and retreating from recent highs. 

Therefore, we believe that the Centre might hold NSC rates at current levels or peg them up to 8% at most, before staying its hand (this is just an educated guess on our part). This would cap the coupon on FRSBs at 8.35% at most in the current cycle. Of course, if market interest rates don’t fall after peaking and remain at current levels, this would be a good thing for FRSB investors. 

But given that the FRSBs have a 7-year tenure for which you are locked in, rates are bound to fall during your holding period for the bond. As there is a lag between moves in market rates and changes in NSC which later transmit to FRSBs, you can expect high coupons to hold until end of this year at least. But you cannot rule out a moderation after that. 

If FRSB rates are unlikely to go beyond 8.35%, they are unlikely to plunge very sharply either. During the first wave of Covid, we saw 5-year g-sec yields fall to 5% or so and go through many gyrations, but NSC rates were retained at 6.8% through the turmoil. This ensured that FRSB holders earned a better-than-market return of 7.15% through some bad times in 2020-21.

What to expect 

So, the above analysis tells us what you can expect from GOI FRSBs as an investment: 

  • This is not a bond with freely floating rates. It is a bond with rates that float in a limited range.
  • The minimum floor for rates has so far been 7.15%. The maximum may not be much higher than 8.35% (this is guesswork)
  • Market rates filter down to this bond with a lag. Therefore, FRSB’s coupon is likely to hold at 8.05% or higher through 2023. A moderation may be on the cards in the latter half of 2024 or later.  
  • As multiple rate cycles can play out during your 7-year holding of this bond, expect its coupons to move in a range between 7.15% and about 8.35%. The government backing makes this a very attractive return.
  • But as the interest is taxable at slab rates, the bond may not always yield better-than-inflation post-tax returns for folks in the 20 or 30% tax brackets
  • Unlike other floating rate instruments (such as the floating rate bonds auctioned by the RBI or floating rate mutual funds), FRSBs are not traded in markets and are illiquid until maturity. You cannot exit them if market interest rates tumble very sharply. 

Who should invest

The above features of the FRSBs suggest the following strategy for investors: 

  • FRSBs may not be the first option for senior citizens seeking regular income today, as we may be close to the peak of this rate cycle. Investing in the post office Senior Citizens Savings Scheme today allows you to lock into 8.2% interest for a five-year period, without any worries about future rate declines. The recent increase in limits on this scheme allow a senior couple over 60 years of age, to park upto Rs 60 lakh in this scheme, as two separate accounts. 
  • For regular income seekers who are below the age of 60, this bond is a reasonable option given the combination of high safety with reasonable returns. But the variable coupon on this bond will make for fluctuating income. Such investors can allocate a part of their fixed income portfolio to FRSBs. However, they can also take the opportunity today to lock into 8% plus rates for 2-3 year terms with select banks (such as Equitas 888 FD with 8.2% pa). 
  • For investors looking for debt options for long-term goals, compounding of returns is important. FRSBs do not offer any cumulative option and only pay out returns, so this makes them a sub-optimal choice. Corporate bond funds with high quality portfolios and 5 and 10-year constant maturity gilt funds still offer a better option for such investors than FRSBs. The advantage of such funds over FRSBs is the ability to get in at high market yields, make mark-to-market gains if market rates fall, while enjoying anytime liquidity in case of need. Tax incidence is attracted only on redemption. 
  • FRSBs still represent a good choice for investors who have allocated significantly to other options such as SCSS, debt funds and so on and are looking for a capital-protected parking ground for their money.    

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5 thoughts on “Should you invest in GOI floating rate savings bonds?”

  1. Does NSC become an interesting option now with 7.7%, compounding annually and lesser lock-in than FRSB? Does the effective NSC yield turn out to be more than FRSB – 8.05%?

  2. Hi Madam,

    Good article!!

    As you mentioned above, is not freely floated bond unlike regular floating rate bond by RBI and second liquidity is main concern hence it is not suitable for me. Would prefer prime deposits with limited exposure.

    Thank you very much for such a insightful .

    Regards, Vijay

    1. NSC is a better instrument because of compounding and lower lockin. Would be good to wait for quarter to see if NSC rates move higher. In terms of yield hard to surmise what it will be for floating rate bonds as downside is possible.

  3. Hi Aarati,
    Congratulations for a very nice article, Just one query as interest rates is reset on 31st dec and 30th june, however NSc rates are changed quarterly .Currently effective from 1st jan rates are 7.35% if NSC rates were to come down in next quarter ie less than 7.7% so will the effective rate on FRB come down from the expected 8.05% accodingly and rate rise in April quarter have no bearing?
    Where can I find 5 yr constant maturity funds on Prime investor?

    1. Thank you. Going by how they have set rates so far, they take Apr to June rates for July 1. This is bcos interest paid on July 1 is for preceding Jan to June period. Motilal oswal has a 5 year gsrc fund of funds

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