Recently, as a part of new steps to keep the economy buoyant the Reserve Bank of India has proposed to provide a direct access to its government securities investment platform to retail investors. This opportunity by the Reserve Bank has opened the door to a new risk-free investment for all the retail investors in the country and comes as a competitive stance to the fixed deposits of banks and other debt instruments in the market to which the retail investors already had access. But, keeping aside this factor, the forefront aim is to support the government’s programme to expand borrowing.
However, before you jump on to giving huge sums of money to the government it is important to know how these government securities work and how will they affect your portfolio and income. It is also important to note that the yields on government Securities move on account of various factors reflecting the dynamic nature of the market. The investors will thus, have to keep an eye on both domestic and global developments all this while they invest in them.
What has the Reserve Bank of India announced?
A “structural reform” it is said the RBI by proposing to grant direct access to the retail investors to its platform with the aim of deepening the market of government securities or G-secs. Another motive behind this is to help and assist smooth sailing of the government’s enormous expected yearly borrowing programme which total to nearly Rs 12 lakh crore.
On last Friday, the central bank said in the Monetary Policy Review that the retail investors can directly get their “gilt accounts” opened with the RBI. This process will be facilitated through the “Retail Direct facility”. Once they have their accounts opened the investors will be able to access both the primary market and secondary markets. In the primary markets, the investors buy directly from the issuer while in the secondary market the trading takes place among investors.
What are Government securities?
The government securities, also called as G-secs, are debt instruments which are issued by the government. They are considered the safest form of investment because they are issued by the most reliable body in the country – The goverment. While announcing this plan in the monetary policy review the RBI Governor Shaktikanta Das said, “We have this aggregator model through stock exchanges and other types of access, which we have provided, but now we are giving a direct access to the retail investors.”
Is the G-Sec market now accessible to the retail investors? Can they now buy them?
As of now, the retail investors have the permits to submit “non-competitive bids” in government bond auctions with the stock exchanges acting as the aggregators and facilitators of their bids. But now, with the enactment of this proposal by the RBI the whole system is set to reroute itself and move beyond the aggregator model by providing an online access to the government securities market to the retail investors.
Under this aggregation model, the retail investors could only log into the Negotiated Dealing System-Order Matching (NDS-OM) and the stock exchanges had to aggregate the demand for gilts. They would later place the gilt demands to the RBI.
What are the changes that this new proposal will bring in the existing framework?
With this new system in place, a retail investor can place a bid directly with the NDS-OM system without the interference of stock exchanges. They can open their own gilt accounts in the “e-Kuber system”. This is the platform RBI has prescribed for gilt auctions. Thus, the retails investors will now be able to participate directly in the bidding process for buying gilts. They can also trade in the secondary market via these accounts.
Who all had the direct access until now?
Until now, the direct access to the e-kuber platform was with the following:
- Institutional players such as banks
- Primary dealers
- Insurance companies
- Mutual funds
- Foreign portfolio investors (FPIs)
- High net worth individuals.
For retail investors, RBI had granted the access to any of the existing NDS-OM members who could act as Depository Participants (DPs) for depositories National Stock Depository Limited (NSDL) and Central Depository Services Limited (CDSL).
Currently, the Negotiated Dealing System-Order Matching trading platform is used only by the institutional members such as primary dealers, commercial banks, and depository participant banks for the purpose of trading in G-Secs and they do their holdings maintenance of the same in their Subsidiary General Accounts held with the Reserve Bank.
Amid the burgeoning government borrowings states in the latest budget, it is essential for the Central bank to broaden its investor base, a proposal on which it has been working from a long time. On the same lines, it allowed the Non-Resident Indians to access the local government securities market in April 2019. Retail investors can also invest in G-sec via debt schemes of mutual funds that invest in them.
What is the benefit of G-Secs to investors?
As already mentioned, government securities are the safest debt instrument. Retail investors have this as an additional avenue along with already existing options of fixed deposits, tax-free bonds, small savings schemes, and bond funds of mutual funds.
Investors can earn interest income their investment in securities as well as get capital gains by trading them. The low reinvestment risk in case of saving for retirement is also an added benefit as the investor can lock himself at the current yield for as long as 20-30 years in comparison to fixed deposits which are available for a maximum tenure of 10 years.
Therefore, investors who are looking to lock-in their yield for a long period or perhaps planning to invest in fixed deposits can go for the option of investing in these Government Securities. Furthermore, considering the fact that the interest rates have been falling over the last couple of decades, these securities come as a very good instrument to lock yourself in to a fixed yield income for 20-30 years
One thing to keep in mind here is that the Government Securities attract tax on both interest income and capital gains (Capital gains arise when the papers are traded in the market before they mature).
Therefore, a wise investor will be the one who would clearly know what are his purposes, aims, constraints, and liabilities before investing in the proposal.