The central government is satisfied with the purchase of its securities by retail investors via the Reserve Bank of India's (RBI) Retail Direct platform. The platform was launched by the Central bank on November 12 in the hope of opening up a new segment of investors for government securities, by making it convenient for the common man to purchase them.
Individual investors had bought securities worth Rs 74.46 crore as of March 31 in primary auctions via the platform, according to the response to a Right-to-Information query filed by Moneycontrol.
"We have seen good (participation). It is an opportunity to diversify the (investor) base," a government official commented, on condition of anonymity.
A separate RTI query revealed that as of March 27 — four-and-a-half months into the platform's existence — as many as 69,991 people had registered on the RBI's Retail Direct platform. However, of this number, less than half — or 31,217 — had an account.
The number gets smaller when one considers those individuals who wish to participate in the secondary market. As of March 27, only 10,039 people had been authorised by the central bank to trade government securities in the secondary market via the Clearing Corporation of India's Negotiated Dealing System-Ordering Matching segment.
Unsurprisingly, secondary market trade in government securities on the Retail Direct platform has been smaller, at Rs 18.21 crore, as of March 25.
The RBI did not respond to queries on its assessment of the activity on the Retail Direct platform.
No tax boost
Of the Rs 74.46 crore worth of purchases made on the Retail Direct platform in FY22, a significant chunk — Rs 20.77 crore — went into sovereign gold bonds, which can also be bought through other avenues.As such, only Rs 53.69 crore worth of Treasury bills, gilts, and State-government bonds were purchased last year by retail investors, data provided in the RTI response showed.
|Security||Primary market purchases (as of March 31)|
|Treasury bills||Rs 14.32 crore|
|Central government bonds||Rs 18.33 crore|
|State development loans||Rs 21.04 crore|
|Sovereign gold bonds||Rs 20.77 crore|
With the government finding participation on the new platform satisfactory, it is unlikely to see a need to boost activity by exempting the interest earned on these securities from taxes.
"No tax exemptions. We want to keep these transactions straight. It was never expected that they would receive tax exemption. Why would I want to give a tax exemption to somebody investing in government securities?" the aforementioned government official said.A 5-year central government bond currently carries a yield of 6.81 percent. Assuming the investor is in the highest tax bracket, this would amount to a post-tax return of roughly 4.75 percent. In comparison, the interest received on certain small savings schemes of the government are exempt from taxation. Meanwhile, the deposit amount on several small savings schemes as well as banks' five-year fixed deposits can be deducted from taxable income up to a limit.
|Instrument||Rate of interest|
|5-year central government bond||6.81%|
|5-year state government bond||6.93-6.96%|
|5-year bank fixed deposit (State Bank of India)||5.5%|
|5-year small savings time deposit||6.7%|
The government recognises that retail investors can't make much of a dent when it comes to its borrowing programme, with the 2022 budget pegging it at a record Rs 14.95 lakh crore on a gross basis for FY23.
"Across the world, the holding by retail investors of government securities is less. The major players are institutional investors. Even if 5 crore people walked into the bond market, it will not make a material difference," the official said.
Even with the low likelihood of tax incentives to make government securities more attractive, small investors may pour more money into them in the coming months on account of rising interest rates.
The government's large borrowing programme, combined with high domestic inflation, has pushed up interest rates in recent months. For instance, the cutoff rate for the most recent primary auction of the 364-day Treasury bill was 47 basis points higher than it was at the start of 2022.Economists expect the RBI to increase the repo rate by anywhere between 50 basis points and 100 basis points this financial year. This will further push up interest rates on government bonds.