In an effort to improve the participation of individuals in the government securities market (G-sec), the Reserve Bank of India (RBI) has proposed to allow small investors direct access to its platform. This decision is also motivated by the need for the central bank to reduce the costs of funds for the central government, which wishes to borrow Rs 12 lakh crore in 2021-2022.
In Friday’s monetary policy review, the central bank said retail investors can directly open their government securities accounts with the RBI. Retail investors can use this so-called “Retail Direct” mechanism to access both the primary market – where investors buy directly from the issuer – and secondary markets where trading takes place between investors. G-sec are debt securities issued by the government and considered the safest form of investment.
RBI Governor Shaktikanta Das hailed this as “major structural reform”. He said: “In the world, very few countries like the United States and Brazil have done it. In Asia, we are the first to do this.
This is not the first time that the RBI has taken action to improve the participation of individuals in government securities. Currently, retail investors are allowed to submit non-competitive bids in government bond auctions. In addition, exchanges act as aggregators and facilitators of retail offerings.
But now, “as part of the continued efforts to increase the participation of individuals in government securities and improve ease of access, it has been decided to go beyond the aggregator model and provide Retail investors have online access to the government securities market, ”the RBI said.
“Now in the future you and I can place the bid directly. To operationalize this, individuals will be allowed to open gilt accounts in the RBI’s e-kuber system. The RBI will release the details very soon, ”RBI Deputy Governor BP Kanungo said.
Rising public debt is also forcing the RBI to expand the investor base. He’s been trying to do this for some time. In April 2019, for example, it enabled Non-Resident Indians (NRIs) to access the local government securities market.
“We have tried to broaden the base of the government securities market and with the size of government borrowing, it is absolutely necessary that the investor base be broadened,” Kanungo said.
More investors mean that the demand for government bonds will increase and the price they charge for government loans (i.e. the interest rate) will be low.
When asked if the increased interest of individuals in government securities would affect bank term deposits, Das said no.
“As the size of the economy grows, the total volume of savings and deposits will naturally increase. And banks have so many other functions and so many other services that they render, so we don’t think that’s going to undermine the flow of deposits to banks or mutual funds. This is one more avenue that is now available, ”said Das.
Moreover, in a speech on July 22, 2020, the chairman of the Securities and Exchange Board of India, Ajay Tyagi, proposed something similar.
“In order to facilitate a smooth and welcome entry for… newcomers to capital markets, it would be ideal if they started their journey by investing in risk-free G-Secs first. I would suggest that in order to achieve this, G-Secs can be issued as a demat. These new demat account holders, after having acquired investment experience in G-Secs, could then gradually add other securities to their demat accounts.