What Is an RBI Bond & How Does It Work?

What Is an RBI Bond & How Does It Work?
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The Reserve Bank of India, or RBI, is the central bank of India, much like the Federal Reserve is the central bank of the United States. The Reserve Bank of India oversees the currency and credit system within the country, and offers a variety of bonds to help finance the country's debt. RBI bonds are sold with a maturity period of five years, but they can be liquidated on the open market before maturity. However, only citizens of India or non-resident Indians may invest in RBI bonds.

Investing in RBI Bonds

For Indian citizens, RBI bonds offer a stable and more competitive rate of return than bank savings accounts. Most RBI bonds are for five years in length and the return is tax-free. RBI bonds are available through any Reserve Bank of India branch, and are backed by the Indian government. The central government issues government bonds, dated securities and other savings instruments, while the country's individual state governments offer State Department Loans, or SDLs.

RBI Treasury Bills

The Reserve Bank of India offers short term treasury bills of three lengths, 91-day, 182-day and 364-day T-bills. These are zero coupon bills, which means that they offer no interest. Instead, they are sold at a discounted issue price and are redeemable at maturity for full face value. The return to the investor is the difference between the issue price and the maturity value. For instance, a T-bill with an issue price of 98.25 rupees redeemable in 91 days for 100 rupees would show a 7 percent annual return rate.

RBI Cash Management Bills

The Indian Government and Reserve Bank of India also offer short-term investments called Cash Management Bills, or CMBs, in terms shorter than the 91-day T-bills. Proceeds from these bills are used to address any immediate shortages in the government's cash flow, and availability is determined by the needs of the government. Like T-bills, CMBs are sold at a discount and are redeemed at face value upon maturity. The time to maturity and discounted price are determined at auction by the RBI.

RBI Dated Government Securities

The Reserve Bank of India also offers a variety of long-term investments in lengths of up to thirty years. These securities have a coupon, or interest rate, which typically pays interest twice a year. The RBI issues fixed rate bonds, in which the coupon rate does not change; floating rate bonds, where the coupon rate does adjust by adding a spread over the base rate; long term zero coupon bonds which are sold at a discount; and capital indexed bonds, in which the coupon is tied to an index of inflation.