Direct Access to G-Sec Market for Retail Investors: RBI

• 06 Feb 2021

Why in News

Recently, the Reserve Bank of India has proposed to allow retail investors to open gilt accounts with the central bank to invest in Government securities (G-secs) directly and without the help of intermediaries.

• Retail Investor is a non-professional investor who buys and sells securities or funds that contain a basket of securities such as mutual funds and Exchange Traded Funds (ETFs).

Government Security

• A G-Sec is a tradable instrument issued by the Central Government or the State Governments.
• It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year- presently issued in three tenors, namely, 91 day, 182 day and 364 day) 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 Governments issue 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.
  
  • Gilt-edged securities are high-grade investment bonds offered by governments and large corporations as a means of borrowing funds.

Key Points

• Background:
  
  • The g-sec market is dominated by institutional investors such as banks, mutual funds, and insurance companies. These entities trade in lot sizes of Rs. 5 crore or more.
  • So, there is no liquidity in the secondary market for small investors who would want to trade in smaller lot sizes.
• About the Proposal:
  
  • Retail investors will get online access to the government securities market – both primary and secondary – directly through the Reserve Bank.
    
    • The primary market is where securities are created, while the secondary market is where those securities are traded by investors.
  • Retail investors will be allowed to open gilt investment accounts directly with RBI. The account will be called RBI retail direct.
    
    • Gilt Account can be compared with a bank account, except that the account is debited or credited with treasury bills or government securities instead of money.
  • The direct participation of retail investors in the bidding process will be enabled through the core banking solution of Reserve Bank of India- E-kuber.
• Significance:
  
  • Broaden Investor Base:
    
    • Allowing direct retail investment in G-secs will broaden the investor base and provide retail investors with enhanced access to participate in the government securities market.
  • Pioneer in Asia:
    
    • This structural reform will place India in the select league of nations such as the USA and Brazil which have such facilities.
    • India will possibly be the first in Asia to allow direct retail investment in G-secs to open up an additional investment avenue.
  • 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.
• Other Measures Taken to Increase Retail Investment in Government Securities:
  
  • Introduction of non-competitive bidding in primary auctions.
    
    • Non-competitive bidding means the bidder would be able to participate in the auctions of dated government securities without having to quote the yield or price in the bid.
  • Stock exchanges to act as aggregators and facilitators of retail bids.
  • Allowing a specific retail segment in the secondary market.

Source:TH