As a major structural reform, India’s central bank has announced the direct participation of retail or small investors in the primary and secondary markets for trading in government securities. It has now allowed the retail investors to directly open their gilt accounts in the RBI through the ‘Retail Direct’ facility. The retail participation will broaden the investor base and help to smoothen the drive of the government’s borrowing programme of Rs.12 lakh crore for the financial year 2021-22. It will reduce the government’s cost of funds to meet the estimated capital expenditure.
India is one of the few countries to open gilt accounts for retail investors. It is the first in Asia to do it.
What are G-Secs?
The Indian bond market comprises corporate bonds and government bonds. The government securities, also known as G-Secs, are debt instruments issued by the RBI on behalf of the central and state government. These are tradable instruments that are either short term or long term in nature.
The short-term securities are available in the form of Treasury Bills (T-Bills) which are presently issued for three tenors, namely, 91 days, 182 days, and 364 days. The T-Bills are issued at discount and redeemed at par value at maturity, they are zero-coupon securities that pay no interest. Cash management bills (CMBs) are also short-term instruments issued for a maturity period of less than 91 days. They are similar to T-Bills and issued to meet the temporary mismatches in the cash flow of the GOI.
In contrary to the T-Bills the dated securities or bonds are long term in nature whose maturity is normally more than one year. These securities carry a fixed or floating coupon (rate of interest) paid half-yearly on the face value.
The debt instruments issued by state governments are called State Development Loans (SDLs). The state government can issue only bonds or dated securities while the central government issues both T-Bills and dated securities or bonds.
How was it different earlier?
The RBI conducts auctions to issue G-Secs. The RBI conducts the auction through its electronic platform called the E-Kuber (CBS platform). All E-Kuber members can place their bids in the auction through this platform. Commercial banks, specified primary dealers, insurance companies and provident funds, who maintain their current account (CA) and subsidiary general ledger (SGL) account with RBI are the E-Kuber members (also called primary members).
However, the retail investors who do not maintain a current account and subsidiary general ledger account with RBI, are indirectly allowed to participate in select auctions of dated securities or bonds and T-Bills of the government of India through non-competitive bidding (NCB). Scheduled banks, primary dealers and specified stock exchanges are permitted to act as aggregators/facilitators and appropriately allocate securities to their clients. The access of G-Secs secondary market to retail and small investors was also allowed through existing Negotiated Dealing System-Order Matching (NDS-OM) primary members.
What did RBI propose?
RBI had proposed to allow the direct participation of retail investors to the E-Kuber platform of RBI and in the bidding process. Retail investors can access both primary as well as secondary markets through this platform. They can open gilt accounts with RBI through the ‘Retail Direct’ facility.
So far the retail segment was allowed access to NDS-OM secondary market trading platform through primary members to trade in the G-Secs market. The primary members maintain their holdings in government securities in subsidiary general ledger accounts held with RBI. Retail investors can also invest in such securities via mutual funds that invest in debt schemes.
Why should one invest in G-Secs?
Investing in G-Sec securities is advantageous for retail investors due to the following reasons:
G-Secs are the safest form of investment.
The return on investment and repayment of principal is committed by the government of India. They are available in a wide range of tenors from 91 days to as long as 40 years as per the cash requirements.
This will enable locking at the current yield without being exposed to reinvestment risk.
The state government-issued securities provide attractive yields.
Due to transparent price publishing mechanisms and active secondary markets, the prices of securities are readily available.
They can be sold easily in the secondary market to meet the cash requirements. It is an additional avenue for investment besides existing options of fixed deposit, savings deposit, and tax-free bonds.
The major players in the G-Secs market
Major players include commercial banks, institutional investors and primary dealers.
Primary dealers play the role of market makers in the G-Secs market. A market maker provides two-way (both buy and sell) quotes concerning securities.
Other participants are small investors like co-operative banks, regional rural banks, provident funds who are required to statutorily hold G-Secs.
Foreign Portfolio Investors (FPI) are allowed to invest in the limits prescribed.
To manage the portfolio corporates also buy/sell in G-Secs.
Why does this matter?
As per the RBI’s preliminary estimates as of June 2020, 56 per cent of the domestic savings were in bank fixed deposits. The risk-free nature and returns on government securities will facilitate competition with other banks for the interest rates of savings and fixed deposits. The investment in G-Secs provides maximum safety. Being non-risky in nature, the returns against these debt securities will be comparatively low.
Tax and related expenses
However, G-Secs yields are highly volatile in nature, investors who can understand the government securities market and who are willing to hold it till maturity i.e. not bothered by the day-to-day volatility, should think to invest in it. No significant incidental cost is involved in case you buy and hold it till maturity. The cost would be restricted to tax on annual interest earned.
However, if they are sold in the secondary market (i.e. before maturity) then you may have to incur brokerage or other incidental costs concerning the transaction. And it may attract capital gains tax if they are sold at a price above face value, depending on the holding period of the securities.
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