Post its monetary policy committee meeting, the Reserve Bank of India (RBI) announced what is touted to be a major structural reform – the introduction of a platform offering retail investors direct access to purchase government securities. The facility will be called 'Retail Direct'.
According to the RBI Governor, with this move, India will be among the very few nations in the world offering retail investors a direct access to government securities.
Let's break this move down, one critical question a time:
Q) Is this the first time retail investors are being allowed to invest in government securities?
A) Retail investors already have access to government securities through non-competitive bidding on primary auctions through an aggregator, while a select few can purchase from secondary markets through exchanges. Some retail investors choose to build exposure to government securities through products like gilt mutual funds as well. However, it is the first time retail investors will have direct access to the government securities via a platform owned by the Government of India and RBI.
Q) If there were still ways to invest in government securities, why is the platform being introduced?
A) While there are alternate routes for retail investors to invest in government securities, none is as seamless, operationally simple and efficient as the Retail Direct platform is expected to be. The new platform is expected to accentuate retail investors' interest in government securities.
Q) So, how can a retail investor invest in government securities through this new route?
A) Retail investors will now be able to set up a gilt account through RBI's digital platform e-Kuber. E-Kuber is an RBI-owned core banking solution. Once the account is set up, the investor can bid through the anonymous electronic order matching system, also known as the NDS-OM, and purchase the government securities of choice.
Side note: So far, large financial institutions like banks, primary dealers, mutual funds, insurers among others were the only ones allowed to become primary members of the NDS-OM.
Q) Why is this move important for the Reserve Bank and/or the Government of India?
A) RBI also acts as the debt manager to the Government of India. Given that the GoI is on track to undertake a massive public expenditure exercise and that it will need to borrow more funds, retail investments in government securities can be expected to support the agenda. While this is among the key near-term objectives, more strategic long-term benefits include expansion of the breadth and depth of India G-Sec market through increased retail participation. This will play a critical role in setting the tone for the overall development of a robust bond market in India. A robust bond market is the foundation for evolved capital markets and healthy economies.
Q) How does this move benefit retail investors?
A) Government securities rate the highest in terms of credit ratings; this means that government securities are practically free from default risk. For investors considering risk-free investment options, the new platform increases the viability of considering government securities as an alternative instrument. Basis tenure or views on the interest rates, government securities stand to be the best instrument in a variety of scenarios.
Retail investors already investing in government securities through alternative routes or products can do the same in a simpler and more efficient manner through Retail Direct.
The introduction of Retail Direct is yet another progressive and smart move by the RBI in the right direction. The expansion of retail participation in government securities' markets can be expected to bring in a host of short and long term benefits to the economy.
(Nirav Karkera is the Head of Research at Fisdom.)Disclaimer: The views and investment tips expressed by investment expert on Moneycontrol.com are his own and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.