RBI to auction FRBs worth Rs3000 cr

However, the RBI's move has led to a lot of confusion. FRBs are beneficial in a rising interest rate environment, where an investor will get better coupon rates as and when the interest rates rise. This is unlike fixed bonds, where the rate of interest is constant. Investors can also use these securities to hedge against inflation, as the coupon rate rises as and when inflation rises.

In its Q2 review of the monetary policy, the RBI advised that the likelihood of a rate hike in December 2011 is relatively low if inflation moves according to the bank’s projections. With this, all of us are expecting that interest rates have almost peaked, and that inflation would cool down in the near to medium term.

So, if investors feel that the interest rates might go up, then they can invest in the bond. As stated earlier, the bond will also act as a hedge against inflation.

The RBI is also auctioning Rs 4000 cr worth of government securities that have a coupon rate of 8.30% and will mature in 2040, and Rs 6000 cr securities having a coupon rate of 9.15%, maturing in 2024. The move will soften the 10-year benchmark yields, and will ease the liquidity pressure in the markets.