The Reserve Bank of India (RBI) said on Friday (February 5) that it will give small investors direct access to its government securities trading platform.
Retail investors can directly open their gilt accounts with RBI, and trade in government securities. The Governor of the central bank, Shaktikanta Das, described this as a “major structural reform.”
What are government securities, or g-secs?
These are debt instruments issued by the government to borrow money. The two key categories are treasury bills – short-term instruments which mature in 91 days, 182 days, or 364 days, and dated securities – long-term instruments, which mature anywhere between 5 years and 40 years.
But can’t retail investors already invest in g-secs?
Small investors can invest indirectly in g-secs by buying mutual funds or through certain policies issued by life insurance firms.
To encourage direct investment, the government and RBI have taken several steps in recent years. Retail investors are allowed to place non-competitive bids in auctions of government bonds through their demat accounts. Stock exchanges act as aggregators and facilitators of retail bids.
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So what is the need for the current proposal, then?
The g-sec market is dominated by institutional investors such as banks, mutual funds, and insurance companies. These entities trade in lot sizes of Rs 5 crore or more.
So, there is no liquidity in the secondary market for small investors who would want to trade in smaller lot sizes. In other words, there is no easy way for them to exit their investments.
Thus, currently, direct g-secs trading is not popular among retail investors.
“Earlier too, the regulators attempted to popularise g-secs among retail investors – for example, the NSE GoBid app or retail debt market (RDM) segment at the Exchange. But the attempts did not have the desired result due to lack of liquidity. So, while the intention is definitely good, we need to see the details on what RBI will do to make it effective and liquid,” said corporate trainer (debt markets) and author, Joydeep Sen.
What will the current proposal do?
The details are not out yet. However, the RBI’s intention is to make the whole process of g-sec trading smoother for small investors. By allowing people to open accounts in RBI’s e-kuber system, it is hoping to create a market of small investors who will invest in these instruments.
Why is the government and RBI keen to push g-secs to retail investors?
The RBI is the debt manager for the government. In the forthcoming financial year, the government plans to borrow Rs 12 lakh crore from the market. When the government demands so much money, the price of money (i.e., the interest rate) will move up.
It is in the government’s and RBI’s interest to bring this down. That can happen by broadening the base of investors and making it easier for them to buy g-secs.
Are g-secs tax free? How do they compare with bank FDs?
Like bank fixed deposits, g-secs are not tax-free.
They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
However, they are not completely risk free, since they are subject to fluctuations in interest rates.
Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
