Why RBI's floating rate savings bond is the best available investing option now for conservative investors

Time of India

3 days ago

Are RBI Floating Rate Savings Bonds offering more interest than regular bank FDs?
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Bank Name
Interest Rates (p.a.)
Highest interest rate slab currently offered
Interest on FD up to 3-year tenure (%)
Interest on FD up to 5-10-year tenure (%)
%
Tenure
Axis Bank
6.60
15 months to less than 2 years
6.50
6.50
HDFC Bank
6.60
18 months to less than 21 months
6.45
6.40
ICICI Bank
6.60
2 years 1 day to 10 years
6.60
6.60
Kotak Mahindra Bank
6.60
391 days to 23 months
6.40
6.25
YES Bank
7.10
3 years to less than 5 years
7.10
6.75
Punjab National Bank
6.70
390 days
6.40
6.50
Punjab & Sind Bank
7.05
444 days
6.00
6.35
State Bank of India
6.60
444 days - Amrit Vrishti
6.30
6.05
Union Bank of India
6.85
456 days
6.60
6.40
Bank Name
Interest Rates (p.a.)
Highest interest rate slab currently offered
Interest on FD up to 3-year tenure (%)
Interest on FD up to 5-10-year tenure (%)
%
Tenure
ESAF Small Finance Bank
7.60
444 days
6.00
5.75
Jana Small Finance Bank
8.20
5 years
7.75
8.20
slice Small Finance Bank
8.50
18 months 1 day to 18 months 2 days
8.25
7.75
Suryoday Small Finance Bank
8.40
Above 30 months to 3 years
8.40
8.00
Ujjivan Small Finance Bank
7.75
2 years
7.20
7.20
Utkarsh Small Finance Bank
8.25
2 years to 3 years
8.25
7.75
Mind the longer lock-in period
Are RBI Floating Rate Savings Bonds better than other investment options like PPF?
Small savings scheme
Current interest rate
Public Provident Fund
7.1%
Senior Citizens Savings Scheme
8.20%
Post Office Savings deposit scheme
4%
Kisan Vikas Patra
7.5%
Monthly Income Account
7.4%
The safety of government bonds combined with returns that outshine the competition, what more could a conservative investor ask for? On July 01, 2025, the Reserve Bank of India (RBI) revealed that the interest rate for its floating rate savings bond (FRSB) from July to December 2025 will be 8.05%.While these rates on floating rate savings bonds remained unchanged from the January-June 2025 period, at 8.05%, these bonds are currently paying one of the highest interest rates among the safe fixed income investments.Keep reading to find out whether this is the right time to switch from FDs and other small savings schemes such as PPF ( Public Provident Fund ), SCSS ( Senior Citizen Savings Scheme ) and others, and consider investing in the RBI floating rate savings bonds. This is especially relevant for conservative investors who want to earn a bit more than what is currently available through other options.In most cases, yes. According to data from Paisabazaar, most banks offer their highest interest rates on FDs tenured between 2 and 5 years. Interest rates on FDs with terms between 5 and 10 years often fall within the 5-7% range.For example, most major banks such as Axis, HDFC and ICICI offer 6.4-6.6% interest on their FDs tenured between 5 and 10 years. The State Bank of India (SBI) offers 6.05% on its FDs with a term of 5-10 years.The present interest rate offered on the RBI floating rate bonds exceeds even the highest interest rate offered by most banks across all their fixed deposit categories.Source: PaisabazaarInterest rates as of July 2, 2025All FD rates for deposits of less than Rs 3 crore.However, some small finance banks (SFBs) offer a higher rate on long-term FDs as well. For instance, slice Small Finance Bank offers the highest interest rate of 7.75% on its FDs for 5-10 years. Among other small finance banks, only Suryoday SFB offers the highest interest rate of 8% and Jana Small Finance Bank offers 8.20% on their FDs with a 5-10 year tenure.Thus, there are only two SFBs which offer above 8% interest on FDs with a long-term tenure of 5-10 years.Source: PaisabazaarInterest rates as of July 2, 2025All FD rates for deposits of less than Rs 3 crore.However, these FDs are no match for the RBI FRSB when it comes to safety. While SFB FDs enjoy an insurance cover of Rs 5 lakh, the entire amount of RBI FRSB is backed by the Government of India.Says Suresh Darak, Founder, Bondbazaar, 'Given that the bonds are issued by the RBI, they provide the highest safety to investors, more than any fixed deposit available in the market. Moreover, at 8.05%, the returns are higher than bank FDs, which are currently at around 7%. Moreover, we are already in a low interest rate regime given the latest round of repo and CRR cuts. Rates may rise in the future, in which case investors could see higher returns from RBI Floating Rate Savings Bonds since their rates are recalibrated every six months. If investors are comfortable with the lock-in period, they should certainly explore these bonds for their fixed-income investments'.When compared to FDs, the RBI floating rate savings bond scores low on liquidity. This bond has a 7-year lock-in period for people under 60. But, if you look at other small savings schemes, this lock-in period looks shorter less or about the same. For instance, PPF comes with a lock-in of 15 years, while the Senior Citizen Savings Scheme and NSC come with a lock-in period of 5 years.Some RBI Floating Rate Savings Bond customers do get some flexibility to liquidate their investments.Senior and super senior citizens have the option to make premature redemption, i.e. redeem their RBI floating rate savings bond before the lock-in period comes to an end, but not without penalties. According to the RBI, investors aged 60 to 70 can redeem their bonds 6 years from the date of issue.Similarly, investors who are between 60 and 70 can prematurely redeem their RBI floating rate savings bonds 5 years after the date of issue. Super senior citizens, i.e. those aged 80 and above, can redeem their floating rate savings bond after 4 years since the bond was issued.The government left the interest rate on most small savings schemes unchanged this time. For National Savings Certificate (NSC), the rates for the July-September quarter stood at 7.7%.Why this matters is that is because the coupon/interest rate of the RBI floating rate savings bonds is pegged to the NSC. The interest rate offered on RBI floating rate savings bonds is always 35 basis points above the prevailing NSC interest rate. The interest on these bonds is paid out twice annually, on January and July 1.Since the interest rate offered on NSC is currently at 7.7%, the interest rate on the RBI floating interest rate comes to 8.05% (7.7%+0.35%). Though interest rates on Small Savings Schemes are revised quarterly, the next change in RBI FRSB will not happen before January 1, 2026.Again, this adds to the overall value of RBI floating rate interest bonds, since even if the government were to bring down the rates for other small savings schemes, including NSC, in the next quarter, investors in this bond can continue to earn relatively higher interest.Even if the NSC interest rates come down 50 basis points in the next quarter, from the present 7.7% to 7.2%, the RBI FRSB would still yield interest at the rate of 7.55% (7.2%+0.35%), well above the interest offered by regular FDs and other peers. Moreover, you will continue to have the option of getting higher returns when the interest rate cycle turns upwards.Data from Indiapost suggests that between April 2020 and December 2022, NSC rates remained at an all-time, historic low of 6.8%. During this time, most regular bank FDs were offering interest rates between 5 to 5.5%. Even then, the RBI floating rate savings bonds would have yielded interest of 7.15% (6.8%+0.35%), pegging it well above many FD interest rates generally offered by banks on FDs with a tenure of 5-10 years.As the RBI has reduced the repo rate by 1% this year, it may get passed on partially or completely in the small savings schemes sooner or later. For the period starting from January 2026, there may be a reduction in the interest rate offered by the RBI bond.However, small savings schemes being one of the most popular government schemes, the government is unlikely to go for a significant reduction of 1% to replicate the repo rate reduction by the RBI. Unless that happens, RBI FRSB is likely to offer one of the highest returns among the safe fixed-income investment options.Source: India PostExplains Vineet Agrawal, Cofounder, Jiraaf (Bond Investment Platform), 'Backed by sovereign guarantee, these 7-year bonds pay interest every January 1 and July 1, making them ideal for conservative investors seeking steady income. With a low entry requirement of Rs 1,000 and no upper investment cap, they're accessible to a broad range of savers.'These bonds clearly outperform typical bank FDs—where rates have been declining—and offer more stability amid uncertain rate cycles, making these bonds reliable tools for capital preservation and guaranteed returns', adds Agrawal.Other retirement-related, preferred investment options like PPF continue to offer lower interest at 7.1% p.a., along with a 15-year lock-in period. Although at 8.2%, SCSS offers a higher interest rate than the RBI floating rate bond, along with a lower lock-in period of 5 years, the maximum amount you can deposit here is Rs 30 lakh. There are no such investment ceilings under the RBI's floating rate bonds. Hence, senior citizens who have surplus capital to invest after maxing out their SCSS limit can certainly consider RBI floating rate bonds for earning similar interest on their total corpus.