The Reserve Bank of India (RBI)-Retail Direct Scheme has recently been launched by the Prime Minister. The scheme, expected to have a significant impact on the Government bond market, aims to create more opportunities for retail investors.
RBI-Retail Direct Scheme: A Closer Look
In February 2021, the RBI announced its proposal to allow retail investors to open gilt accounts with the central bank in order to directly invest in Government securities (G-secs). Under this scheme, individual (retail) investors will be able to open and maintain a ‘Retail Direct Gilt Account’ (RDG Account) with the RBI.
Retail investors are considered non-professional investors who buy and sell securities or funds such as mutual funds and exchange-traded funds (ETFs). When compared to a typical bank account, a Gilt Account is different in that it is debited or credited with treasury bills or government securities instead of money. This move puts India among a select group of countries offering such a facility.
Objective of the Initiative
The introduction of this scheme seeks to diversify the government securities market, currently dominated by institutional investors including banks, insurance companies, mutual funds, among others. Although foreign portfolio investors are allowed to invest in G-secs, their shares make up only about 2-3% in the overall market.
The Portal – Scope and Offerings
This new portal provides an avenue for investing in Central Government securities, treasury bills, State development loans, and sovereign gold bonds. It becomes a platform for investment in both primary and secondary market government securities markets. ‘Negotiated Dealing System-Order Matching Segment (NDS-OM)’, a screen-based anonymous electronic order matching system used by the RBI for trading government securities in the secondary market, is particularly useful here.
Significance of the Scheme
Underlying this initiative are several important motives:
1. Building an Atmanirbhar Bharat: Until now, small investors, salaried individuals, and small traders could only invest indirectly in the government securities market through banks and mutual funds.
2. Improved Ease of Access: The scheme smoothens G-sec trading procedures for small investors, enhancing retail participation and convenience.
3. Facilitate Government Borrowings: This, along with relaxation in Hold To Maturity provisions, aims to ensure seamless completion of the government’s borrowing programme in 2021-22.
4. Financialise Domestic Savings: Allowing direct retail participation in the G-Sec market could be a game-changer, leading to the financialisation of a considerable pool of domestic savings.
Additional Measures to Encourage Retail Investment in Government Securities
Besides launching the scheme, other measures have been implemented to increase retail investment in government securities. These include the introduction of non-competitive bidding in primary auctions, enabling stock exchanges to act as aggregators and facilitators of retail bids, and allowing a specific retail segment in the secondary market.
Government Security – What It Is?
A government security (G-Sec) is a tradable instrument issued by the Central or State Governments. It acknowledges the Government’s obligation to repay debt. They are either short term (treasury bills with original maturities of less than one year) or long term (Government bonds or dated securities with an original maturity of one year or more). Known as risk-free gilt-edged instruments, G-Secs carry practically no default risk and are considered high-grade investment bonds offered by governments and large corporations for borrowing funds.
