The Reserve Bank of India (RBI) recently made headlines when it proposed a plan to enable retail investors to open gilt accounts directly with the central bank. This allows them to invest in government securities (G-Secs) without needing intermediaries. This move aims to democratize and broaden investment opportunities, making India a pioneer in Asia in this aspect.
Understanding Retail Investors and Government Securities
A retail investor is a non-professional investor who deals in securities or funds, including mutual funds and Exchange Traded Funds (ETFs). They typically buy and sell securities in smaller volumes compared to institutional investors.
Government securities (G-Secs) are tradable instruments issued by the Central or State Governments. These assets represent government debt obligations and come in both short-term (typically known as Treasury Bills with maturities of less than a year) and long term (usually referred to as Government bonds or dated securities with original maturity of one year or more). Due to their low default risk, they are considered risk-free gilt-edged instruments.
Current Market Scenario
Currently, the G-Sec market is primarily occupied by institutional investors such as banks, insurance companies, and mutual funds. These entities deal in lot sizes of Rs. 5 crore or more, leaving little liquidity for small investors who may want to trade in smaller quantities.
The RBI Proposal: What Does It Entail?
Under the new proposal, retail investors will obtain online access to the primary and secondary government securities markets directly through the Reserve Bank. Here, the primary market refers to where securities are generated, and the secondary market denotes where these securities are traded among investors.
As part of the plan, retail investors will be allowed to open an account—termed ‘RBI Retail Direct’—directly with the RBI. This gilt account functions similarly to a bank account, but with transactions involving Treasury Bills or Government securities instead of money.
Implications of the Proposal
The introduction of this reform is expected to enhance retail investors’ access to government securities, broadening the investor base. This places India among a select group of nations like the USA and Brazil that provide such facilities. In fact, India might be the first Asian nation to permit direct retail investment in G-Secs—an additional investment avenue for its residents.
This measure, along with the relaxation of the mandatory Hold To Maturity provisions, will help facilitate smoother completion of the government’s borrowing program for 2021-22. It will also promote the financialisation of domestic savings, potentially revolutionising India’s investment market.
Additional Steps Towards Encouraging Retail Investment
In addition to its recent proposal, RBI has also introduced measures like 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. These steps are all aimed at encouraging retail investment in government securities.