Floating Rate Note (FRN)
A debt instrument whose coupon resets periodically based on a reference benchmark rate — such as MIBOR (Mumbai Interbank Offered Rate) for corporate FRNs or the NSE 182-day T-bill cutoff for RBI-issued FRNs — providing investors protection against rising interest rates.
Floating Rate Notes (FRNs) in India existed in both sovereign and corporate segments, each using different reference rates. RBI issued Floating Rate Savings Bonds (FRSBs) — such as the 7.15% FRB 2035 and the FRSB-2020 (T) — linked to the National Savings Certificate (NSC) rate, which itself reflected government small savings policy. The RBI also issued FRNs specifically through market auctions as part of the G-Sec programme, with coupons linked to 182-day T-bill cut-off yields with a spread.
In the corporate bond market, FRNs typically used MIBOR (specifically the overnight MIBOR or 3-month/6-month Mumbai Interbank Offer Rate as administered by FBIL) as the base rate, with a credit spread added on top. For example, a three-year FRN from an AAA-rated NBFC might offer MIBOR + 100 bps, with the coupon resetting quarterly. The MIBOR replacement by the Secured Overnight Rate (SOFR-equivalent transition in India, discussed under FBIL's benchmark reform) introduced complexity into FRN markets post-2021.
From an investor perspective, FRNs offered a natural hedge against interest rate risk. In a rising rate environment, fixed-coupon bonds lose value because their coupons are locked at lower rates — but FRN coupons rose with the reference rate, preserving value. Conversely, in declining rate environments, FRNs underperformed fixed-coupon bonds of similar tenure.
In mutual fund portfolios, floater funds were specifically mandated by SEBI to hold at least 65 percent of assets in floating rate instruments, including FRNs. Fund managers also used FRN holdings in ultra-short, money market, and short-duration funds to manage interest rate sensitivity. SEBI's scheme categorisation circular (October 2017) created the distinct floater fund category.
The floater fund category attracted significant interest from investors during the RBI rate-hike cycle of 2022-23, as the reset mechanism limited NAV drawdown relative to medium-duration or long-duration funds.