The article begins with recent news of the Reserve Bank of India (RBI) announcing the ‘RBI Retail Direct’ Scheme. Proposed in February 2021, this initiative allows retail investors to open gilt accounts directly with the central bank and invest in Government securities (G-secs). The move marks an important shift in financial policy aimed at democratizing access to government debt securities.
What is RBI Retail Direct?
Under the scheme, retail investors will have the opportunity to open and maintain a ‘Retail Direct Gilt Account’ (RDG Account) with the RBI. Essentially, a retail investor is a non-professional investor engaging in the buying and selling of securities or funds containing a basket of securities such as mutual funds and Exchange Traded Funds (ETFs).
An RDG account functions similarly to a traditional bank account, with treasury bills or government securities being debited or credited instead of money. Investors can open these accounts through an online portal specifically designed for this purpose.
A Revolutionary Trading System
The online portal will provide registered users access to the primary issuance of G-secs and access to the Negotiated Dealing System-Order Matching system (NDS-OM), introduced by the RBI in August 2005. This electronic, anonymous, screen-based order-driven trading system serves as a one-stop solution, promoting investment in G-secs by individual investors.
Current Dynamics of the G-Sec Market
Currently, the G-sec market is majorly dominated by institutional investors like banks, mutual funds, and insurance companies that trade in lot sizes of Rs 5 crore or more, thereby making it harder for small investors to exit their investments due to lack of sufficient liquidity in the secondary market.
Significance of the RBI Retail Direct Scheme
The implementation of the scheme improves ease of access for small investors, thereby increasing retail participation in G-secs. This measure, coupled with a relaxation in obligatory Hold To Maturity provisions, will facilitate the smooth completion of the government borrowing program in 2021-22.
Revolutionizing Domestic Savings
Permitting direct retail participation in the G-Sec market will foster financialisation of a significant pool of domestic savings and has the potential to transform India’s investment market profoundly.
Innovative Measures for Retail Investment in Government Securities
Additional initiatives to boost retail investment in government securities include the introduction of non-competitive bidding in primary auctions and allowing stock exchanges to act as aggregators and facilitators of retail bids.
What are Government Securities?
Also known as G-Secs, these are tradable instruments issued by the Central or State Governments acknowledging the Government’s debt obligation. These securities can be short term (also known as treasury bills) or long term (also known as Government bonds or dated securities). G-Secs carry practically no risk of default, hence, they are referred to as risk-free gilt-edged instruments.
