RBI Bonds to see interest rate drop with cut in small savings rates

Written by eveningindia

The Government of India Savings Bonds (Taxable), popularly called the RBI bonds will see a drop in their interest rate following a cut in the interest rate for small savings schemes. The interest rate on the RBI bonds is linked to the rate on National Savings Certificates (NSCs) with a 0.35% gap and is reset every 6 months. In Jan 2021 the rate was 7.15% given the 6.8% interest rate on NSCs. In a notification today, the Government cut the interest on NSCs by 0.9% from 6.8% to 5.9%.

As a result the RBI bonds are likely to see a drop in their interest rate from 7.15% to 6.25%. The RBI bonds have a tenor of 7 years and the interest rate on them is fully taxable. “I think investors can consider target maturity debt exchange traded funds (ETFs) and index funds for this type of time horizon. These are low cost and a number of these have been launched recently with a ‘roll-down’ type structure. This means that the fund buys and holds bonds till its target date and thus is able to give a predictable return. Such funds also benefit from indexation which reduces the burden of capital gains tax if held for more than 3 years,” said Tarun Birani, founder and director of TBNG Capital Advisors Pvt Ltd., a Sebi Registered Investment Advisor.

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