Floating Rate Bonds in India: How They Work and Who Should Invest
Quick answer: Floating rate bonds (FRBs) pay a coupon that resets periodically based on a benchmark rate — typically RBI's repo rate or the 91-day T-bill yield — plus a fixed spread. When rates rise, your interest income rises with them. When rates fall, it falls too. Unlike fixed-rate bonds, FRBs carry minimal price risk from rate movements, making them particularly relevant when rates are elevated or expected to climb.
Imagine you locked in a 7% fixed deposit in early 2022, only to watch RBI hike the repo rate by 250 basis points over the next 18 months. Your neighbours who held floating rate instruments were earning more with every rate action; you were stuck at 7%. That scenario captures exactly why floating rate bonds deserve a place in the conversation.
This post explains how floating rate bonds work, what the Indian market currently offers, how they stack up against fixed-rate alternatives, who might find them useful, and what pitfalls to watch for — so you can decide whether they fit your portfolio's needs.
Key Takeaways
- Floating rate bonds reset their coupon at regular intervals — typically every six months — based on a benchmark rate plus a pre-defined spread, so your income tracks prevailing market rates.
- The RBI 7.02% Floating Rate Savings Bond (FRSB) is the most accessible FRB for retail investors — it resets every six months based on the National Savings Certificate (NSC) rate plus 35 bps; there is no fixed maturity for its successor products, but terms vary by issuance.
- Price risk is substantially lower than fixed-rate bonds of equivalent maturity — because coupon income adjusts, the bond's market value stays closer to par even when rates swing.
- FRBs are not "risk-free" in any absolute sense — RBI FRBs carry no credit risk (they are sovereign instruments, conventionally used as the risk-free benchmark), but corporate FRBs carry both credit risk and residual interest rate risk.
- If your view is that rates will fall significantly, a fixed-rate bond may serve you better — locking in a high coupon now preserves that income even after cuts.
- Taxation follows the same rules as other bonds — coupon income is taxed at your slab rate; capital gains on listed FRBs held beyond 12 months attract LTCG at 12.5%.
- Liquidity varies widely — RBI FRSBs are non-tradeable and must be held to maturity; listed corporate FRBs can be sold on exchanges but secondary market depth is thin for smaller issuers.
- A bond ladder mixing FRBs and fixed-rate bonds can smooth income across interest rate cycles without concentrating all bets on a single rate direction.
What Exactly Is a Floating Rate Bond?
A floating rate bond is a debt instrument whose coupon payment is not fixed for the entire tenure. Instead, it resets at defined intervals — usually semi-annually — by referencing an external benchmark and adding a spread.
The Anatomy of a Floating Rate Coupon
Coupon = Benchmark Rate + Spread
For example, if the benchmark is the 91-day T-bill yield (say 6.80%) and the spread is 50 bps, the coupon for that period is 7.30%. Six months later, if the T-bill yield has moved to 7.10%, the next coupon resets to 7.60%.
The spread is fixed at issuance and does not change over the bond's life. It reflects the issuer's credit quality and market conditions at the time of issue. Understanding the relationship between this spread and underlying benchmarks is closely tied to understanding bond yields more broadly.
Common Benchmarks Used in India
| Benchmark | Where It Is Used | Reset Frequency |
|---|---|---|
| NSC Rate | RBI Floating Rate Savings Bonds | Semi-annual |
| 91-Day T-Bill Yield | Government FRBs (institutional) | Semi-annual |
| Repo Rate | Some corporate FRBs and bank bonds | Quarterly or semi-annual |
| MIBOR / SOFR equivalent | Short-term institutional instruments | Daily / monthly |
Retail investors in India primarily encounter two categories: RBI-issued sovereign FRBs (accessible via RBI Retail Direct or scheduled banks) and corporate FRBs / NCDs with floating coupons (listed on NSE/BSE and available on bond platforms).
RBI Floating Rate Savings Bonds: The Retail Investor's Primary Option
The Government of India, through RBI, periodically issues Floating Rate Savings Bonds targeted at retail investors. The last widely available version (the 7.15% FRSB 2020 series, later reset to 8.05% based on NSC rate + 35 bps) became popular during the 2022–2024 rate-hike cycle.
Key Features of RBI FRSBs
| Feature | Detail |
|---|---|
| Minimum investment | ₹1,000 (in multiples of ₹1,000) |
| Maximum investment | No upper limit |
| Tenure | 7 years from date of issue |
| Coupon reset | Every 6 months (January 1 and July 1) |
| Benchmark | NSC rate + 35 bps |
| Premature withdrawal | Allowed for senior citizens (60+) after lock-in period; others must hold to maturity |
| Tradability | Non-tradeable — cannot be sold or transferred |
| Nomination | Available |
| Holding form | Physical certificate or Bond Ledger Account (BLA) via bank |
The non-tradeable nature is the single most important constraint. If you invest ₹10 lakh in an FRSB, that money is committed for 7 years (with limited exceptions for senior citizens). You cannot sell it on an exchange if you need funds urgently. This makes it suitable primarily for investors with a genuine 7-year horizon and no foreseeable liquidity need.
You can invest in RBI FRSBs through the RBI Retail Direct platform or through authorised banks (SBI, HDFC, ICICI, and others).
How the NSC Linkage Works
The NSC rate is set by the Ministry of Finance and reviewed quarterly. As of mid-2026, the NSC rate is 7.7%, making the FRSB coupon 8.05% (7.7% + 0.35%). If the government revises the NSC rate upward in the next review, the FRSB coupon rises automatically at the next reset date. If the NSC rate falls, so does your coupon.
This linkage means FRSB holders are partially insulated from rate cuts (the NSC rate tends to be sticky and is revised less aggressively than market rates), but they also benefit less from rapid rate hikes compared to instruments benchmarked to the repo rate or T-bill yields.
Corporate Floating Rate Bonds: Higher Yield, More Complexity
Beyond the sovereign offering, a range of corporates — primarily NBFCs, housing finance companies, and PSU banks — issue FRBs or floating-rate NCDs. These are listed on exchanges and can be bought and sold in the secondary market.
How Corporate FRBs Differ from RBI FRSBs
| Dimension | RBI FRSB | Corporate FRB |
|---|---|---|
| Credit risk | Nil (sovereign) | Present — depends on issuer rating |
| Tradability | Non-tradeable | Listed; secondary market varies |
| Typical tenure | 7 years | 2–10 years |
| Benchmark | NSC rate | Repo, T-bill, or MIBOR |
| Yield over sovereign | Zero (this IS the sovereign) | 70–400+ bps depending on rating |
| Minimum lot size | ₹1,000 | ₹1,000–₹10,000 (platform-dependent) |
| Premature exit | Very restricted | Possible via secondary market |
Corporate FRBs can be evaluated using the same framework as fixed-rate corporate bonds. Credit ratings matter — a AAA-rated NBFC FRB carries very different risk from a BBB-rated one. Our guide on AAA-rated bonds in India walks through what AAA designation actually means and its historical default record.
Reading the Spread Carefully
A corporate FRB might be issued as "Repo + 175 bps." If the repo rate is 6.50%, the initial coupon is 8.25%. When RBI cuts rates to 6.00%, the coupon drops to 7.75%. You earn more when rates rise and less when they fall — exactly as you would expect. But critically, the spread of 175 bps over repo is the market's assessment of the issuer's credit risk at issuance. If the issuer's financial health deteriorates, secondary market prices may fall even if the benchmark rate is unchanged. Understanding how credit ratings are determined and what they mean is therefore essential before entering any corporate FRB position.
Floating Rate Bonds vs Fixed-Rate Bonds: The Core Trade-Off
The choice between floating and fixed-rate instruments boils down to your view on rates and your sensitivity to income predictability.
| Dimension | Floating Rate Bond | Fixed-Rate Bond |
|---|---|---|
| Income predictability | Low — varies each reset | High — locked in at purchase |
| Price risk (duration) | Very low | Moderate to high |
| Benefit if rates rise | Yes — coupon rises | No — stuck at lower coupon |
| Benefit if rates fall | No — coupon falls | Yes — coupon locked at higher level |
| Suitable rate environment | Rising or uncertain rate environment | Peak rate / falling rate environment |
| Interest rate risk | Minimal | Significant for longer maturities |
Bond duration is the underlying concept that explains why fixed-rate bonds lose market value when rates rise. A 10-year fixed-rate bond with a duration of 7.5 years falls roughly 7.5% in market value for every 1% rise in yields. A floating rate bond of equivalent maturity has an effective duration close to the time until the next reset — often just 3–6 months — which is why it barely moves in price when rates shift.
If your portfolio is heavily weighted toward long-duration fixed-rate bonds and you are concerned about rate risk, exploring how RBI rate changes affect your bond portfolio may provide useful context.
A Practical Example
Suppose you invest ₹10 lakh across two scenarios in January 2026, with RBI's repo rate at 6.50%:
Scenario A: Fixed-Rate Bond at 8.2% (5-year tenure, duration ~4.2 years)
- Annual coupon income: ₹82,000
- If rates rise 1% by mid-2026: Bond's market value falls by ~₹42,000 if you need to sell
Scenario B: Floating Rate Bond at Repo + 170 bps (5-year tenure, resets semi-annually)
- Initial coupon: 8.2% → ₹82,000
- If rates rise 1%: Coupon resets to ~9.2% → ₹92,000 at next reset; market value barely changes
- If rates fall 1%: Coupon resets to ~7.2% → ₹72,000 at next reset; market value stays near par
Neither scenario is universally superior. If rates ultimately fall, the fixed-rate holder is better off. If rates rise, the FRB holder benefits. The FRB holder, however, faces less mark-to-market volatility in either case — which matters if the bond is held in a portfolio where you may need to exit before maturity.
Taxation of Floating Rate Bonds in India
Floating rate bonds are taxed the same way as other bonds. There is no special treatment for the variable nature of the coupon.
Coupon income: Treated as "Income from Other Sources" and taxed at your applicable slab rate (up to 30% + cess for those in the highest bracket). This applies whether the coupon is 6% or 10% — the rate of tax does not change with the coupon level.
Capital gains on listed FRBs:
- Held more than 12 months: LTCG at 12.5% (no indexation, post FY 2024-25 rules)
- Held 12 months or less: STCG taxed at slab rate
RBI FRSBs: Non-tradeable, so no capital gains scenario arises for most investors. All income is coupon income, taxed at slab.
For investors in the 30% tax bracket, the after-tax yield on FRB coupons is materially lower than the stated rate. A detailed breakdown of how bond interest is taxed in India covers the mechanics, including TDS applicability and advance tax considerations.
Common Mistakes Floating Rate Bond Investors Make
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Assuming "floating" means "always higher than fixed" — A floating rate coupon can and does fall when benchmarks are cut. Investors who buy FRBs at rate peaks expecting sustained high income may be disappointed as the cycle turns. FRBs provide rate protection in both directions, not a ratchet upward.
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Ignoring liquidity constraints on RBI FRSBs — The 7-year lock-in (with limited carve-outs for senior citizens) catches investors off guard when financial circumstances change. Investing emergency funds or short-term savings in FRSBs can create real problems. Only deploy money with a genuine 7-year horizon.
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Overlooking credit risk on corporate FRBs — The floating coupon addresses interest rate risk, not credit risk. A downgrade or issuer stress event can cause the bond's price to drop sharply regardless of what the repo rate is doing. Reviewing warning signs of bond defaults is prudent before entering any corporate FRB position.
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Conflating low price risk with "safe" investment — FRBs carry low duration risk, but that is only one dimension of risk. Credit risk, liquidity risk, and reinvestment risk still apply. The low price volatility of FRBs can create a false sense of security, particularly for corporate issuances with lower credit ratings.
Frequently Asked Questions
What is the current coupon rate on RBI Floating Rate Savings Bonds?
As of July 2026, the coupon on RBI Floating Rate Savings Bonds (FRSB 2020 series) is 8.05% per annum, paid semi-annually. This is derived from the current NSC rate of 7.7% plus a fixed spread of 35 basis points. The rate resets on January 1 and July 1 each year. If the government revises the NSC rate at the next quarterly review, the FRSB coupon will be adjusted accordingly at the next reset date. Investors should verify the prevailing rate at RBI Retail Direct or their bank before investing, as these rates are subject to change.
How is a floating rate bond different from a fixed deposit?
A fixed deposit locks in a rate for its entire tenure — you know exactly what you will earn from day one. A floating rate bond resets its interest payment based on a market benchmark, so your income changes over time. FDs are bank deposits covered by DICGC insurance up to ₹5 lakh; bonds are market instruments and carry varying degrees of credit risk. FDs are straightforward to exit (with a penalty); listed FRBs can be sold on exchanges, while RBI FRSBs cannot. For a broader comparison of fixed income options, the post on bonds vs fixed deposits covers the key distinctions in depth.
Can I sell an RBI Floating Rate Savings Bond before maturity?
No — RBI FRSBs are non-tradeable. You cannot sell them on any exchange or transfer them to another person. Premature encashment is permitted only for investors aged 60 and above, subject to minimum holding periods: 6 years for those aged 60–70, 5 years for those aged 70–80, and 4 years for those aged 80 and above. For other investors, the bond must be held for the full 7-year tenure. If liquidity is a consideration, listed corporate FRBs on exchanges may be a more suitable alternative, though secondary market depth varies by issuer.
Are floating rate bonds a good hedge against inflation?
Partially, but indirectly. FRBs hedge against rising interest rates — and since central banks typically raise rates in response to inflation, FRB coupons tend to rise during inflationary periods. However, the coupon adjusts to the benchmark rate, not directly to inflation. If inflation is high but rates remain suppressed (as happened in some post-pandemic environments), the FRB coupon may not keep pace with actual price rises. The relationship between inflation and bond returns is explored in more detail in our dedicated post on the topic.
What is the minimum investment in floating rate bonds in India?
For RBI FRSBs, the minimum investment is ₹1,000, with no upper limit. For listed corporate FRBs, the minimum varies by platform and issuer — many OBPPs allow investments from ₹1,000 to ₹10,000 face value per bond. Institutional FRBs (issued to large investors) have much higher minimums, but these are generally not accessible to retail participants directly. If you are setting up a demat account to access bond markets for the first time, the KYC and demat account setup guide provides a step-by-step walkthrough.
How do I compare floating rate bonds across different platforms?
Key parameters to compare are: the benchmark used (repo rate, T-bill, NSC), the spread over the benchmark, the reset frequency, the credit rating of the issuer (for corporate FRBs), tenure, and whether the bond is listed and liquid. Since coupon income changes over time, comparing FRBs on a straight yield basis requires projecting forward scenarios for the benchmark. Most bond aggregators allow you to filter by floating vs fixed coupon type. The bond platforms comparison guide outlines what features to look for when evaluating different aggregators and OBPPs.
Bottom Line
Floating rate bonds occupy a specific and useful role in a fixed income portfolio: they reduce duration risk and provide income that adapts to the interest rate environment. If your horizon aligns with the tenure, you are in a rising or uncertain rate cycle, and predictable income is less critical than protection from rate risk, FRBs — particularly RBI FRSBs for the sovereign-safety seeker or listed corporate FRBs for those seeking higher yield — are worth exploring. Conversely, if rates appear to have peaked and you want to lock in elevated coupons, fixed-rate instruments may serve that goal better. As with any fixed income instrument, matching the product to your specific horizon, liquidity needs, and tax situation is more important than chasing the highest headline rate.
Disclaimer: This post is for educational purposes only. BondDekho is not a SEBI-registered investment adviser. Yields and risks mentioned are illustrative; consult a SEBI-registered adviser before making any investment decision.