In a historic step towards motivating retail investors to become direct investors in government bonds, the Reserve Bank of India announced on Friday that it will permit retail investors to directly lend to the government, making India the first Asian country to allow small investors to directly lend to the government. Presently, there is a way for retail investors to purchase government bonds through the goBID platform on the National Stock Exchange (NSE).
According to the latest RBI announcement, retail investors who are not interested in stock market risk will have a new channel called Retail Direct, similar to the stock trading platforms that will be directly controlled by the central bank. The RBI has provided the government a new infinity source to borrow from. Till date, banks, insurance firms, and international investors were the main sources for the government to borrow money from.
During a press conference, the RBI governor Shaktikanta Das said, “We have this aggregator model through stock exchanges but now we’re giving retail investors direct access”. He added, “With the size of the government borrowing, it is absolutely necessary that the investor base is broadened”. With the current move, the government will borrow money from the retail investors too. There are some countries which follow similar systems for retail investors, such as the United Kingdom, Brazil and Hungary.
Saugata Bhattacharya, Senior Vice President at Axis Bank said, “For retail investors, this is relatively trouble free way otherwise they would have to go through mutual funds to invest in government securities. It’s a convenient way for them to diversify their portfolio”. He added, “The investors also have access to small savings instruments — unless the rates on small saving instruments are rationalized and brought in line with the government securities the interest to invest in government securities would be relatively moderate”.
Further information regarding the new framework that will enable retail investors to enter the online government securities market and allow them to open glit securities accounts with the apex bank will be published by the RBI in the near future. A glit account is similar to a savings account. The account will be debited and credited with treasury bills or government securities instead of money.
Due to less risk, government securities are also often considered as ‘risk-free gilt-edged instruments.’ Moreover, as they come with a sovereign guarantee, government securities are deemed to be safe than fixed deposits (FDs) in banks. This move will favor pensioners who are always in search for safe investment choices that in the long term will provide them with guaranteed returns.
