On selling government bonds to the public

With little room to cut key interest rates in his monetary policy delivered on Friday, RBI Governor Shaktikanta Das decided to surprise markets with a new scheme: selling government bonds directly to the public. The move is supposed to address multiple objectives. On the one hand, the Centre needs to raise Rs 12 lakh crore in debt this year and wants to cast its net further than the small circle of banks and funds that traditionally buy its bond issuance.

On the other, in an era where interest rates on bank deposits are falling and stock markets are behaving like the proverbial yo-yo, a safe house is required for people to keep their savings. The RBI’s Retail Direct is supposed to be the stone that kills both birds. The hope is that as a bond issued by the sovereign is the safest option, customers will be attracted to it.

However, the problem with it is that government bond issuances typically offer low to moderate returns. While the 10-year bonds offer about 6.126% return, shorter duration ones offer even lower rates. The competition for public deposits in safe houses will thus be between the government and the banks it runs, which the public has favoured till now for keeping their savings safe.

Either one or the other will be beggared in the process, regardless of Das’s assertion that there are enough deposits in the market for all to partake. The only game changer that can occur in this is if the rules of deposit safety change. In case several state-run banks are sold off or start reporting losses or mounting bad debts, the resultant fear psychosis among the public may lead to a shift in deposits towards the ultra-safe gilt market.   

The RBI’s bid to give the Centre access to what would be easy money could also renew the state’s old habit of borrowing beyond its means. As it is, the pile of public debt has risen to nearly 85% of GDP. If the debt tap is free-flowing, the tendency to borrow more today and let the next government bother about the fallout will only be strengthened. Das’s rabbit, instead of bringing home carrots, may well take the state into a dark rabbit hole from where India may be at risk of coming out as another Greece.