Will RBI move increase retail participation in G-Sec market?

The Reserve Bank of India’s decision in its February monetary policy meet to hold the key interest rates was much anticipated and as per the industry’s expectations. According to industry experts, the monetary policy focused on three aspects – ensuring liquidity, road map to meet the borrowing program for FY22 and supporting economic growth by including NBFCs and new MSMEs for easier credit supply.

“The MPC decision to leave the repo rate unchanged and continue with its accommodative policy stance is as per our expectations and should aid the government efforts towards economic revival. However, I feel the main highlights of this MPC meeting outcome are the decisions to allow retail investors to open Gilt accounts with the RBI and allow banks to deduct credit sanctioned to new MSME loan applicants from their Net Demand and Time Liabilities (NDTL) while calculating their CRR,” said Naveen Kukreja, CEO & Co-founder, Paisabazaar.com.

Providing online access to retail investors to invest in both primary and secondary government securities (G-Sec) markets will further encourage and deepen retail investor participation in this segment. Retail investors will get a new window, in addition to the existing small savings schemes, to directly invest in fixed income instruments with sovereign guarantee. This should also significantly increase the investor base for the government to raise resources for financing its increased budgetary spending.

Commenting on the RBI move to allow retail investors to open Gilt accounts with the apex bank, Nimish Shah, Chief Investment Officer – Listed Investments, Waterfield Advisors, however, said, “The initiative to increase retail participation in G-Sec was put in motion many years ago, but unfortunately did not yield any result. We have not heard of retail investors investing in G-Sec. The efficacy of this move also depends on the platform they are creating from an ease of transaction and low cost perspective. Given the taxable nature of coupon income, it may not find substantial allocation in an investor’s portfolio. Most fixed investments are in mutual fund growth schemes with 3 year perspective so as to take advantage of LTCG.”

Also, AAA-rated corporate and PSU bonds offer 0.5% to 1% better yield than G-Secs. Net of tax, an FD or a Corporate Bond Fund may also give better or similar returns. “The yield on tax-free bonds is around 4.5%, which is better than a sub 4% net of tax return on a 3/5 year G-Sec. While a promising move, a lot will depend on the platform and parallel investment opportunities available,” he added.

It may be noted that the economic disruptions caused by the Covid pandemic had led banks to become extremely conservative while sanctioning loans to ‘new to credit’ loan applicants and lower income groups. “This increased risk averseness had an adverse impact on the credit access for these segments. The decision to allow banks to deduct credit sanctioned to new MSME loan applicants from their NDTL while calculating their CRR will incentivise banks to improve access to institutional credit for the new MSME borrowers and can even reduce their borrowing cost as well. I expect the RBI to extend this provision to bank credit sanctioned to ‘new to credit’ individual borrowers and those in the lower income groups as well in the near future,” said Kukreja.

Moreover, the RBI decision to announce an integrated and centralised ombudsmen scheme for banks, NBFCs and non-bank digital payments service providers should simplify the grievance resolution mechanisms for the consumers. Similarly, the decision to set up a centralised 24/7 helpline for queries related to digital payment products will enhance consumer trust and confidence in digital payment systems and, thereby, help increase the acceptance and penetration of digital payment.