Government securities (G-Secs) are bonds issued by a sovereign, and so, there is no credit risk at all. However, retail investors didn’t have the option to directly buy government bonds. Until now.
The Reserve Bank of India has decided to provide retail investors online access to the government securities market, primary as well as secondary. Retail investors will also get a facility to open their gilt securities accounts (Retail Direct) with the RBI. This move, RBI says, is part of continuing efforts by the central bank and the government to increase retail participation in G-Secs and improve ease of access.
“For the last many years, we are trying to broad-base the government securities market and with the size of the government borrowing, it is absolutely necessary that the investor base is broadened. This is a paradigm shift that you and I can also open a Gilt account with RBI in the e-Kuber system. It will be a direct participation in the G-Sec market, in the bidding process,” said B.P. Kanungo, deputy governor of RBI, said.
According to RBI governor Shaktikanta Das, few countries allow this and in Asia, India will be the first country where direct retail participation in G-Secs is allowed.
“This is a positive move for the retail investors who wish to seek moderate and safe returns from the G-Sec market and this will further improve liquidity via improved retail participation in the G-Sec market,” said Madan Sabnavis, chief economist at CARE Ratings.
Currently, retail investors can buy G-Secs only through non-competitive bidding in primary auctions through stock exchanges. There are several debt mutual funds (gilt funds), which invest in G-Secs, which also you can invest in.
“The decision to provide retail investors with online access to the G-Sec market is a positive step towards further deepening the bond market and building an alternative asset class,” said Sidharth Rath, MD and CEO, SBM Bank India.
The government has a large borrowing programme. Finance Minister Nirmala Sitharaman has set a target of Rs 12 lakh crore via market borrowings in 2021-22. Allowing retail investors in this backdrop will certainly help the Centre tap a large pool of investors.
But, there is no guarantee that retail investors will rush in droves to invest in G-Secs. Retail participation in the corporate bond market, for instance, has been low due to the complexity of their pricing, said Sabnavis.
“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,” he said.
What retail investors also need to consider is the yields on G-Secs. Current yield on a 10-year G-Sec is around 6.12 per cent. G-Secs of shorter tenures have lower yields. So, even as G-Secs have no credit risk at all, investors may not find the yields too attractive. Also, based on the prevailing interest rate, bond prices will change. Typically, as interest rates go up G-Sec prices will fall and vice-versa.
If you are investing in Gilt mutual funds, data shows that last three year returns have been around 9.5 per cent. But, this was also a period where interest rates were falling. The Reserve Bank of India reduced its benchmark Repo rate by 135 basis points in 2019 and a further 115 basis points last year. With economic growth expected to pick up and cost-push inflation a worry, a chance of a further rate cut this year may be limited. So, returns on these investments may not be the same.
The RBI will be issuing detailed guidelines for the retail direct participation in G-Secs soon. Investors will be well advised to look at their risk appetite, expected returns, interest rates among other things before taking the plunge.
