RBI Nudges Retail Investment In Government Bonds With Direct Access
Retail investors will now have greater access to the government bond market via a new direct investment option being offered by the central bank.
The Reserve Bank of India on Friday announced that retail investors can buy and sell government securities directly via accounts held with the central bank. Details of the facility and how it will work are awaited.
“It is proposed to provide retail investors with online access to the government securities market – both primary and secondary – directly through the Reserve Bank (‘Retail Direct’). This will broaden the investor base and provide retail investors with enhanced access to participate in the government securities market,” RBI Governor Shaktikanta Das said in his comments following a scheduled monetary policy review.
“This is a major structural reform placing India among select few countries which have similar facilities,” said Das, adding this more direct route of investment is continuation of previous measures to improve retail participation in government bonds.
How Will It Work?
Details of the facility being termed as ‘retail direct’ will be issued separately, the RBI said.
"It entails a paradigm shift as investors can open gilt accounts with RBI in the e-Kuber system. It would be direct participation in the G-sec market and in the bidding process," B.P. Kanungo, deputy governor at RBI said in response to a BloombergQuint query during a virtual press conference.
Presently, entities such as banks, primary dealers, insurers and mutual funds who maintain a subsidiary general ledger account with the central bank are allowed to become primary members of NDS-OM — RBI's order matching system for secondary market trading in government securities. Individuals or entities who have gilt accounts with the primary members can indirectly place bids through them on the e-Kuber system, which is the core banking solution of the RBI.
How Is This Different From Earlier Attempts?
Previously, retail investors have had access to the G-sec market via non-competitive bidding in primary auction. Exchanges are also permitted to route primary purchases and some segments of retail investors are also permitted in the secondary market.
“The RBI’s move to allow retail participation directly through its platform removes the need for going through intermediaries such as exchanges and brokers to make investments in government securities,” said Nimish Shah, chief investment officer - listed investments at Waterfield Advisors.
“However, the move may not be disruptive because investors look at returns and the government securities interest income is a subject to marginal tax. Further, considering the yields have been falling for the past year, in the short-term investors may rather prefer fixed deposits / mutual funds over G-Secs” Shah said.
Retail trade in government securities has never got off the ground because of operational issues and the lack of an institutional market maker for debt that provides two-way quotes, said Harsh Roongta, founder of investment advisory firm Fee Only Investment Advisers Llp. “From the tone of the statement, it seems that RBI or one of the bodies under the regulator will be filling this lacuna. If so, this is a very exciting news for retail investors from that perspective. But if two-way quotes are not provided through the retail direct platform of RBI, then it is hard to say how it is disruptive.”
Dhruv Mehta, independent financial advisor and chairman of Federation of Independent Financial Advisors, agreed that the earlier direct investment routes never gained traction. “Now if RBI allows investors to open gilt accounts directly through its channel, it will not only improve the access for retail investors by leaps and bounds, but also democratise and facilitate government’s borrowings. However, its execution will be of prime importance for this to take-off among investors,” Mehta said.
When asked whether a successful direct access route to government bonds can hurt the deposit base of banks, Das said he does not see this as a risk.
"As the GDP grows and the Indian economy comes back to the higher growth trajectory, the total volume of savings and deposits will expand. Considering the banks have so many other functions and services which they render, we feel that this (allowing direct retail participation in G-sec) will not undermine the flow of deposits to banks or mutual funds," said Das.