RBI scheme to increase retail participation in government securities: What is it and will it succeed?

The Reserve Bank of India (RBI) in its latest monetary policy meeting has decided to allow retail investors to participate in government securities by opening an account with it.

Let us discuss how it will work and whether retail investors will really participate in it.

What is the proposal

As per the RBI decision, individuals will be allowed to open a gilt account through the RBI’s electronic platform. The retail investor will be able to buy and sell government securities online through this platform. The exact modalities on how this will function are yet to be made available by the RBI. This will help expand the scope of products available to retail investors to invest in fixed income instruments. This will also help the government in its plan to borrow from the market due to a wider participation in the security sale by the government.

Who should participate in it

As far as the question as to who should avail this facility is concerned, in my opinion the retired persons who need regular income for day-to-day expenses should invest by opening an account with the RBI. Moreover, all those who wish to invest in fixed income products and do not wish to take any credit risk should also participate in it as and when the system becomes functional as it offers you the sovereign guarantee on your investments. One can also consider investing in government securities, one’s portion of debt to ensure proper asset allocation of the portfolio.

For non-salaried, there are only a few products available for fixed income products, except PPF where one can invest only upto Rs 1.50 lakh every year. Senior citizens have additional avenue of investing in “Senior Citizen Savings Scheme” and “Pradhan Mantri Vaya Vandana Yojana” where they can have investments upto only Rs 15 lak at any given point of time in each of the schemes. Though retail investors have the option to invest in RBI floating rate savings bonds yielding presently 7.10% interest. Investments in these products can yield excellent returns specially when the investments are made in longer duration government securities when the interest rates are at their peak. However, since these have a lock-in period ranging from five years to ten years, they are not suitable for investors who wish to play on interest rate cycle and for whom this platform will provide opportunity to play on interest rate cycle in fully safe investments.

Will it work?

In my opinion, significant retail participation is not going to happen soon due to absence of general awareness about the availability of such an option. This is evident from the level of participation in mutual fund products as compared to the money kept with the banks as fixed deposits. A huge financial investment as a proportion of savings is held in bank deposits and not even in mutual fund products about which there is fair awareness in the public. Since the key to success of retail participation in any financial product is awareness, the government needs to educate retail investors about the nuances of the government securities market through aggressive campaigning.
The decision of the RBI to allow individuals to open an G-sec account with it is a good decision, but in my opinion it will not have broad-based participation from retail investors. Only the HNIs (High Net Worth Individuals) will be able to avail the benefit of this facility to invest in the government securities.

Presently the RBI floating rate savings bonds offer 7.15% rate of interest without there being any limit on the amount one can invest in these bonds. Against this, the yield on government securities is around 6% only and thus in all likelihood retail investors who have a time horizon of at least seven years will prefer investing in the saving bonds and not in the government securities. However, this platform will provide investment avenues to those who have a time horizon of less than seven years and who wish to trade in their fixed income products to avail the benefit of interest rate cycle.

Let us wait for the modalities for retail investors to participate in the scheme.

(The writer is a tax and investment expert, and can be reached at jainbalwant@gmail.com)