Retail investors in the country will now have greater access to the government bond market via a new direct investment option being offered by the central bank. Governor Shaktikanta Das said it is a “major structural reform”.
As from now the retail participants can take direct exposure on the government bond market. The move will likely change the dynamics of the bond market in India and could obviate the need for the country to chase foreign investors by listing Indian bonds in global bond indices.
Domestic investors, if tapped meaningfully, are potentially an inexhaustible source of funds for the government when it is trying to borrow Rs 12 trillion from the markets in the next financial. This is also widening the investor base even without compromising on existing policies on domestic bond investment much.
This move allows retail investors to directly invest in the safest fixed income avenue in the country and gives an alternative safer than bank fixed deposits as G-secs come with a sovereign guarantee. Deposits with banks are only insured up to Rs 5 lakh per depositor under the Deposit Insurance Credit Guarantee Scheme (DICGS). It is likely that the move will especially suit pensioners looking for a safe investment option that can give them assured returns for the long term.
Experts says, usually, the government securities market is dominated by institutional investors like mutual funds, banks, insurance companies. However, small investors are also allowed to bid for government securities via their demat accounts.
Allowing retail participation in the G-Sec market is a bold step towards the financialisation of a vast pool of domestic savings and could be a game-changer,” said State Bank of India chairman Dinesh Khara.
This is a big reform in our view, but the uptake may only be gradual, said Pranjul Bhandari, chief India economist of HSBC.
The move to allow investment through the portal ‘Retail Direct’ was a “path breaking reform”, said Indian Banks’ Association (IBA) chairman and Union Bank of India MD and CEO Rajkiran Rai G. “However, the retail customers need to be educated on the nuances of the government securities market. For this more awareness is to be created,” Rai said.
The governor tried to allay fears of a substitution effect on bank deposits and mutual fund products. “As the GDP grows and the size of the economy grows, the total volume of savings and deposits will naturally expand. Banks have so many other functions and services which they render. So, we feel that it will not undermine the flow of deposits to banks or mutual funds. It is one more avenue that has been made available.