February 6, 2021 4:19:14 am
In a bid to improve retail participation in the government securities (G-sec) market, the Reserve Bank of India (RBI) has proposed to allow small investors direct access to its platform. This move is also driven by the central bank’s need to keep down the costs of funds for the central government, which wants to borrow Rs 12 lakh crore in 2021-22.
In the monetary policy review on Friday, the central bank said retail investors can directly open their gilt accounts with the RBI. Retail investors can use this so-called ‘Retail Direct’ facility to access both the primary market – where investors buy directly from the issuer — and secondary markets where trading takes place among investors. G-secs are debt instruments issued by the government and considered the safest form of investment.
RBI Governor Shaktikanta Das hailed this as a “major structural reform.” He said, “World over very few countries like the US and Brazil have done it. In Asia, we are the first to do it.”
This is not the first time that the RBI has moved to improve retail participation in government securities. Currently, retail investors are allowed to submit non-competitive bids in auctions of government bonds. Further, stock exchanges act as aggregators and facilitators of retail bids.
But now, “as part of continuing efforts to increase retail participation in government securities and to improve ease of access, it has been decided to move beyond aggregator model and provide retail investors online access to the government securities market,” said the RBI.
“Now, going forward, you and I can directly place the bid. To operationalise this, individuals will be allowed to open gilt accounts in the RBI’s e-kuber system. The RBI will come out with the details very soon,” said RBI Deputy Governor B P Kanungo.
The burgeoning government debt also makes it essential for the RBI to broaden the base of investors. It has been trying to do so for some time. In April 2019, for instance, it allowed non-resident Indians (NRIs) to access the local government securities market.
“We have been trying to broad-base the government securities market and with the size of the government borrowing it is absolutely necessary that investor base is broadened,” said Kanungo.
More investors mean the demand for government bonds will increase and the price they charge for lending to the government (i.e the interest rate) will be low.
When asked if more retail interest in government securities will hit bank fixed deposits, Das said it won’t.
“As the size of the economy grows, the total volume of savings and deposits will naturally expand. And the banks have so many other functions and so many other services which they render, so we feel that it will not undermine the flow of deposits to banks or mutual funds. It is one more avenue which is now made available,” said Das.
Incidentally, in a speech on July 22, 2020, the chairman of the Securities and Exchange Board of India, Ajay Tyagi, had proposed something similar.
“With a view to facilitating a smooth and welcome entry of … newcomers to the capital markets, it would be ideal that they begin their journey by first investing in risk free G-Secs. I would suggest that, to achieve this, the G-Secs may be issued in demat form. These new demat account holders, after gaining experience of investing in G-Secs could then gradually add other securities to their demat accounts.”
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