Retail investors shall be allowed to open gilt accounts with the Reserve Bank of India. The central bank has proposed to provide retail investors with online access to the government securities market - both primary and secondary - directly through the Retail Direct platform. The details have not yet been specified, though.
"This will broaden the investor base and provide retail investors with enhanced access to participate in the government securities market. This is a major structural reform placing India among select few countries which have similar facilities," RBI Governor Shaktikanta Das said while announcing the monetary policy on Friday.
The central government and the RBI have taken several measures in the past to encourage retail investment in government securities including introduction of non-competitive bidding in primary auctions, permitting stock exchanges to route primary purchases and allowing a specific retail segment in the secondary market.
"It is commendable for the RBI to have taken the bold step to open government securities (G-Secs) to direct retail participation. Besides opening a near endless demand source, it will also provide the retail investors a highly secure - sovereign-guarantee rated - fixed income investment avenue," says Kedar Deshpande, Head - retail distribution, ICICI Securities.
"The success of other RBI-backed products like Sovereign Gold Bonds has given the RBI enough confidence that there exists a strong demand for such sovereign-guaranteed products. It will also encourage formalisation, digitisation, and financialisation of savings with low yield non-financial assets expected to move to better yield and secure instruments," he adds.
A scheme of non-competitive bidding was introduced in January 2002 to enable small and medium investors to participate in the primary auction of government securities without having to quote the yield or price in the bid. Further, for a wider reach and active participation in the government securities market, a facility of retail trading in stock exchanges was provided from January 16, 2003.
"This measure together with HTM relaxation, will facilitate smooth completion of the government borrowing programme in 2021-22," the RBI Governor stated.
Currently, there exists a window for retail investors where they can place their buy and sell orders through intermediaries who buy from Negotiated Dealing System-Order Matching (NDS-OM) platform, convert that security from subsidiary general ledger (SGL) to demat form and then transfer it to individual demat accounts. This normally takes 4-5 working days. Retail investors' participation remains low.
"Understanding of GILTS, conversion from SGL to demat and vice versa is cumbersome, liquidity for retail lot (anything less than 5 crore is odd lot) and low yield or return compared to other AAA-rated or PSU or private sector NCD are some of the issues," highlights Vikram Dalal, MD, Synergee Capital Services.
The ownership pattern of the government securities suggests that the investor base has been dominated by institutional investors like banks, insurance companies and provident funds. Mutual funds, on the other hand, have a share of 2.4 per cent and doesn't seem to have taken off in a big way. Besides, the average net asset under management (AUM) of gilt funds that invests primarily in government securities is around Rs 18,000 crore which is even less than 1 per cent of the overall industry's AUM.
CARE Ratings also believes that it is a positive move for the retail investors who wish to seek moderate and safe returns from the G-Sec market but expressing similar concerns, it says, "We have seen that retail participation in the corporate bond market has been very low due to the complexity of their pricing. Liquidity in secondary market for most G-Secs is limited and hence it is hard to sell those which cease to be the benchmarks. Therefore, there may not be too much participation. Also yields may not be attractive compared with even FDs of banks."
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