RBI Retail Direct Scheme- A Significant Milestone In Government Securities Market

The Reserve Bank announced the activation of the RBI Retail Direct Scheme with effect from 12TH November 2021. The Scheme was launched through virtual mode by the Hon’ble Prime Minister, Shri Narendra Modi.

A Government Security (G-Sec) is a tradable instrument issued by the Central Government or the State Government. It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year) or long term (usually called Government bonds or dated securities with original maturity of one year or more). In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Government issues only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs carry practically no risk of default and, hence, are called risk-free gilt-edged instruments.

Nuts and Bolts of the Scheme

• The G-Secs market has witnessed significant changes during the past decade. Introduction of an electronic screen-based trading system, dematerialized holding, straight through processing, establishment of the Clearing Corporation of India Ltd. (CCIL) as the Central Counter Party (CCP) for guaranteed settlement, new instruments, and changes in the legal environment are some of the major aspects that have contributed to the rapid development of the G-Sec market.

• Major participants in the G-Secs market historically have been large institutional investors. With the various measures for development, the market has also witnessed the entry of smaller entities such as co-operative banks, small pension, provident and other funds etc. These entities are mandated to invest in G-Secs through respective regulations.

• The Reserve Bank of India has, therefore, taken several initiatives to bring awareness about the G-Secs market among small investors.A significant milestone in the development of the Government securities (G-sec) market, the Reserve Bank of India-Retail Direct (RBI-RD) Scheme will bring G-secs within easy reach of the common man by simplifying the process of investment.Under the Scheme, retail individual investors will be able to open a Retail Direct Gilt (RDG) Account with the Reserve Bank of India, using an online portal (https://rbiretaildirect.org.in).

RBI -RD Platform

• Govt Of India Treasury Bills

• Govt Of India Dated Securities

• Sovereign Gold Bonds

• State Development Loans

Investments can be made using the following routes:

• Primary issuance of government securities: Investors can place bid as per the non-competitive scheme for participation in primary auction of government securities and procedural guidelines for SGB issuance.

• Secondary market: Investors can buy and sell government securities on NDS-OM (‘Odd Lot’ and ‘Request for Quotes’ segments).

What’s New?

So far, in the government securities market, small investors class, salaried class, small traders had to invest through banks and mutual funds in an indirect manner. With this scheme It will make the process of G-sec trading smoother for small investors therefore it will raise retail participation in G-secs and will improve ease of access. Allowing direct retail participation in the G-Sec market will promote financialisation of a vast pool of domestic savings and could be a game-changer in India’s investment market.

Aim of the scheme

The move is aimed at diversifying the government securities market, which is dominated by institutional investors such as banks, insurance companies, mutual funds and others. While foreign portfolio investors were allowed to invest in G-secs, their holding is around 2-3% in the overall market.

Significance of the Scheme:

• Building an Atmanirbhar Bharat:

So far, in the government securities market, small investors class, salaried class, small traders had to invest through banks and mutual funds in an indirect manner.

• Improved Ease of Access:

It will make the process of G-sec trading smoother for small investors therefore it will raise retail participation in G-secs and will improve ease of access.

• Facilitate Government Borrowings:

This measure together with relaxation in mandatory Hold To Maturity (securities that are purchased to be owned until maturity) provisions will facilitate smooth completion of the government borrowing programme in 2021-22.

• Financialise Domestic Savings:

Allowing direct retail participation in the G-Sec market will promote financialisation of a vast pool of domestic savings and could be a game-changer in India’s investment market.

Challenges

• Lack of Awareness :  People have very little knowledge about the G-sec Market. With experts dealing with the MFs the complex process was simple for investors without knowing much about the market

• Low Liquidity : Low Liquidity is another drawback to be considered. Even though G sec are considered a  safe investment option for long term investors, experts believe that RBI should infuse more Liquidity in the secondary market.

• Choosing the G-sec : Investing in the Right G sec is also an challenge for the investors as interest earned in G sec is taxable in the hands of the investors.

Synopsis

The RBI is the debt manager for the government. In the forthcoming financial year, the government plans to borrow Rs 12 lakh crore from the market. When the government demands so much money, the price of money will move up. It is in the government’s and RBI’s interest to bring this down. That can happen by broadening the base of investors and making it easier for them to buy g-secs.

RBI Retail Direct Scheme is a big structural reform, a revolutionary step of the GOI and India will be the first country in Asia to give access of G-Secs to Retail Investors. Very few countries in the world allow this facility to Retail Investors.It will deepen/broad base the Bond Market as more funds will be available with the corporate who can raise financing from Markets without Govt. borrowing disruption

However In a rising interest rate scenario, investors are likely to incur mark-to-market losses if they sell it before scheduled maturity. The interest rate cycle is set to change amid rising consumer prices. Also  some experts have the opinion that without any tax benefits and Liquidity infusion the scheme may not be attractive. Also small savings schemes offer much interest rates that G-sec.

 Despite of all challenges RBI has received a positive response and has tweeted

“Encouraging response to RBI Retail Direct Scheme; 12,000+ registrations as of 2.30 pm on November 13, 2021.”