The RBI allows retail investors to invest directly in government securities: learn more here


The RBI now allows direct investments after a lukewarm response to its previous scheme to enable small investors to invest in government securities via stock exchanges.

Investing in government bonds is about to get a lot simpler. Retail investors will be provided online access to the government securities market – both primary and secondary – as well as the ability to open gilt securities accounts with the Reserve Bank of India (RBI), according to RBI Governor Shaktikanta Das’s monetary policy announcement earlier today. Retail Direct will be the name of this facility. The facility’s specifics will be revealed later. The Reserve Bank of India has previously urged institutional investors to invest in g-secs. So far, the answer has been lukewarm. However, analysts believe that the latest move would attract more retail investors to the g-secs segment. Here’s what you need to know about the RBI’s most recent move and how it will help you.

What are g-secs (government securities)?
These are debt instruments issued on behalf of the Central Government by the Reserve Bank of India. State governments also use these tools to collect funds; these are known as State-Development loans.

G-secs are available for a variety of lengths of time, ranging from 6 months to 40 years. Interest is usually charged twice a year and is taxed at the marginal tax rate. The 10-year government security bond yield is a commonly used metric by market participants to gauge the economy’s long-term interest rate movement. It is commonly known as a benchmark defence. The current yield on a 10-year g-sec bond is 6.11 percent.

Any of these bonds will now be available for purchase directly from the primary and secondary markets. G-secs are guaranteed by the government and do not bear the chance of default.

Is that to say they’re fully risk-free?
No, it’s not true. Government securities are not risk-free, despite the fact that they do not bear credit risk. They are at risk of interest rate increases. Bond prices decrease as interest rates rise.

And this is where, considering the current economic climate, you, as an investor, should exercise caution. Budget 2021 proposed a major borrowing programme, which would, sooner or later, push bond yields higher. Prices of debt securities, like g-secs, would decline as a result.

On the back of declining interest rates, gilt mutual funds (schemes that invest in g-secs) returned 9.49 percent in the three years ended February 4, 2021. Once interest rates begin to rise again, this will not last long.

G-secs are a vintage instrument. But why have institutional investors shied away from them so far?

Since g-secs are a low-risk investment, the returns are also low. As opposed to other fixed-income securities such as corporate fixed deposits, small savings instruments, and non-convertible debentures, interest rates have not been attractive. For instance, Power Finance Corporation, a CPSE, issued a 10-year NCD with a 7% coupon, which was higher than the 10-year G-sec yield, which was a tad below 6%.“Investments in government bonds are normally unattractive to retail investors looking for a high yield on their fixed income investments,” says Vikram Dalal, founder and Managing Director of Synergee Capital Services.

Most investors are concerned about the secondary market’s lack of liquidity. Despite the fact that the NSE-GoBID facility or platform allows investors to buy gilts in auctions and obtain them in their demat accounts, there are no volumes on the exchanges except in rare cases. Investors’ only option for selling these bonds is to move them to a constituent subsidiary general ledger (CSGL) account, which they can then sell.

The majority of investors have no idea how a CSGL account operates. The CGSL is a depository account that holds government securities and promotes trading on the Negotiated Dealing Scheme (ODS) (NDS-OM). “It takes about ten days to convert from demat to CSGL format,” Dalal says.

Another significant issue is the large lot size needed for g-sec trading. The g-sec market usually sees trades worth Rs 5 crore and up. If you want to buy and sell g-secs worth less than Rs 5 crore, there isn’t much liquidity. If such trades do occur, they are not conducted at a reasonable cost. In the majority of situations, you are obligated to keep the bond until it matures.

A few banks attempted to attract investors by offering government securities as an investment option. It did not, however, produce any volume. The NSE-Go Bid platform enabled investors to participate in a non-competitive government securities auction. RBI also authorised non-competitive bidding in state development loans in June 2019.

As a result, mutual funds have remained the most common way for institutional investors to invest in g-secs so far.

Can g-secs Retail Direct run smoothly?
Although more details are still being worked out, the RBI has opened up an instrument that has previously only been available to large institutional investors. “It may be the start of a competitive alternative to small savings plans at market rates. According to Mahendra Jajoo, Chief Investment Officer- Fixed Income, Mirae Asset Management India, “the likely pick-up pace will be at a slow rate, similar to sovereign gold bonds.”

Individual investors can buy government securities through the current NSE-GoBID facility, which allows them to participate in non-competitive bidding in which they are issued bonds at a cut-off price determined by the other institutional participants in the auction. “On the NSE-GoBID, an investor cannot determine the price at which he wishes to purchase. He’s a bargain hunter. Individual investors should be able to quote the yield at which they want to buy government bonds under the new (direct) scheme, according to Deepak Panjwani, GEPL Capital’s Head of Debt Markets.

The operating guidelines for the ‘account’ in which the individual investor will keep the securities will be scrutinised as well. Already, the distinction between Demat and CSGL is a deterrent. Since the investor is opening a “account with RBI” under the new scheme, he should be able to trade government securities on NDS-OM.

“The RBI may recommend appointing market makers to provide two-way quotes to ensure liquidity in secondary markets. Only retail investors or trades of a certain size – say between Rs 10,000 and Rs 10 lakh – may be eligible for market-making through some institution such as primary dealers, according to Joydeep Sen, corporate trainer (Debt market).

“RBI could also promote retail participation by enabling retail investors to sell government bonds they own to RBI in open market operations,” Panjwani says.

Should you take the risk?

Details about how easy or difficult it will be to purchase these g-secs directly are awaited.
Be certain, however, that you understand how interest rate risks operate. Investing in a 20-year or 40-year government bond and holding it until maturity is perfect. In theory, it seems to be a smart idea, but the ongoing uncertainty can be unsettling. Rising interest rates cause bond prices to decline, resulting in a capital loss if you sell your bond at that time.

Finally, keep an eye on the yields, which will be among the lowest since g-secs have no credit risk.