By P Saravanan and Sumit Banerjee
Indian stock markets have grown in leaps and bounds to keep the investor at the center of initiatives. However, bond markets have remained quite inaccessible to individual investors as they are dominated by institutional investors. This is history now. On November 12, 2021, Prime Minister Narendra Modi launched the RBI Retail Direct Gilt program with the aim of enabling retail investors to purchase government securities.
What is RBI Retail Direct Gilt?
This program allows investors to open a Retail Direct Gilt (RDG) account to invest in primary issue operations and on the secondary market of government securities. Investors can bid for four types of securities, such as Indian Government Treasury Bills, Indian Government Dated Securities, Gold Sovereign Bonds, and State Development Loans through this account.
New avenues of investment
RBI RDG is a new investment avenue, especially for conservative investors who prefer a safe investment vehicle over stocks and derivatives. These investors usually limit their investments in term deposits, PPFs, etc. Within the framework of this scheme, the four securities are available to investors in order to diversify their portfolio according to the product and the duration. Treasury bills allow investments for shorter terms of 91 days, 182 days and 364 days. In contrast, SGBs have a maximum term of eight years (prepayment is allowed after five years), and government dated securities can have a longer term of up to 10 years.
The RBI RDG program is changing the way Indian small investors access government securities. Rather than opting for an indirect route of investing in these securities through insurance programs or targeted government securities mutual funds, investors can invest directly through the newly launched program. Since there are no fees associated with investing through RDG except for payment gateway fees, savings will be made upfront.
Used as collateral
The system also allows the securities to be pledged or a lien registered on them. This facility increases the liquidity of the securities. It also makes it possible to provide securities as collateral for the loan facilities of financial institutions. This pledge / lien / guarantee feature is beneficial for investors as they can retain ownership of the instrument while raising funds and financial institutions also prefer to have highly liquid securities as collateral.
In addition, the likelihood of these securities losing value is much less compared to other asset classes such as residential or commercial properties, making them preferable security as collateral.
Available for minors too
The program is also available for minors, but the minor and guardian must open accounts. This, along with the ability to donate government securities to other direct retail investors, makes it easier for parents to teach their children about saving and investing habits from an early age. The donation function also makes it easy to transfer securities from one retail direct investor to another.
In conclusion, from customer service to governance mechanisms and user-friendly interface to information dissemination, the government and regulators have facilitated the direct investment of individual investors in gilt edge instruments through this program.
Saravanan is professor of finance and Banerjee is a doctoral student at IIM Tiruchirappalli