The RBI recently announced that the retail investors would soon be able to open Gilt accounts. Government securities would now be made available to retail investors with the introduction of a new platform called the “Retail Direct”. RBI believes that this is a game changer for the economy as retail investors will now access to G-sec in a rather more hassle free process.
Who is a Retail Investor?
Retail investors are individuals or small investors who trade with smaller amounts in the equity market. Their investments are generally smaller as compared to institutional investors, which results in them having to pay higher commissions or fees to the brokers.
What is a Gilt account?
Government bonds or securities in the UK , India and several other commonwealth countries are called Gilts. They are equivalent to the US Treasury bonds in their respective countries. Gilts consist of government bonds, securities and treasury bills. These securities are rated high in their returns (when held for a long time) and low risk as compared to other equity options. So far, only institutional investors were having direct access to government securities. They can be held in physical forms and dematerialized forms.
RBI and Retail investors
As RBI announces the introduction of gilt accounts for retail investors, one might note that these government securities are already available for the retail market. Retail investors have access to G-sec through non-competitive bidding on primary auctions through aggregators. Some of the retail investors have chosen Gilt funds to make investments in government securities. The stock exchanges are allowed to reroute the primary purchases and also allow a specific retail segment in the secondary market. Here’s how you can invest in government securities:
- The eligible retail investors have to participate in a non-competitive bidding (NCB) at RBI through an aggregator or a facilitator.
- The National Stock Exchange (NSE) acts as one of the aggregators and places a collective single bid at the RBI.
- Retail investors can place their bids through a registered member of NSE or using the NSE goBID web platform or mobile app.
- After placing bids, securities are credited to the account of the registered member of the NSE and then transferred to the Retail investors’ demat account.
The process of investing in government securities as a retail investor can be hectic and time consuming. To simplify this process RBI is launching the “Retail Direct” platform as it aims to simplify the process and attract more retail investors. While there are other ways to invest in government securities, none of them are as seamless, simply operational and efficient.
How is RBI doing this?
This will be the first time retail investors will be having direct access to the government securities through a platform owned by the government of India and the RBI. Retail investors will be able to set up a gilt account through RBI’s digital platform e-Kuber. e-Kuber is the core banking solution used by RBI for huge transactions and services. Once the account is set up, the investor can bid through NDS-Om. It is a screen based anonymous order matching system for trading in government securities owned by RBI. Currently, it is open to entities maintaining an SGL account (large financial institutions such as banks, mutual funds, insurers etc.) with RBI.
Expanding the market horizon
The government of India is coming up with various solutions to control its economic narrative. As it plans to curb expenses and reduce capital expenditure, it is trying to expand its fund raising potential in the Indian Market as the market itself is enormous. The recent example of this was the IPO launched by the Indian Railway Financial Commission (IFRC) in January 2021, which will be raising funds to finance various projects laid out by the Ministry of Railways.
Benefits for Retailers
Government securities are high in returns with practically zero risk. They have been by far the safest option in terms of tenure and interest. This platform makes it workable for investors looking for alternative solutions for better returns on their long term investments. Retail investors already investing in government securities through alternative routes can now invest directly through this platform in a less complicated and efficient manner. It will save all the hassle that a retail investor has to go through to buy government securities.
The government has taken several measures in the past for engaging more retail investment by introducing bids through non competitive bidding. Allowing direct access to retail investors into government securities seems like a smart move to increase the inflow of retail investment. "This will broaden the investor base and provide retail investors with enhanced access to participate in the government securities market. This is a major structural reform placing India among select few countries which have similar facilities," RBI Governor Shaktikanta Das said while announcing the monetary policy on Friday.
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. Along with its new initiative and good old major players, we're now here to observe how the retail behavior brings a change in its due course.