Prime Minister Narendra Modi on Friday launched the Reserve Bank of India's [RBI] 'Retail Direct' scheme, which will let retail participants buy and sell government securities (G-Secs) by opening an account directly with the RBI.
While retail participants are already permitted to participate in the buying and selling of G-Secs, they had to go through stock exchanges like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE) or other brokers or intermediaries to access the secondary G-Sec market. This scheme simply lets retail consumers buy and sell G-Secs directly through the RBI which issues bonds on behalf of the government.
Further, consumers can also directly participate in primary market auctions for the issuance of new bonds through this scheme, in what was otherwise perceived to be a convoluted and arcane process.
Consumers interested in owning G-Secs can now open a free account with the RBI through the portal rbiretaildirect.org.in. They would need to complete their know-your-customer (KYC) norms and submit required identity documents. They can then trade in G-Secs and place bids on bond auctions directly through their bank accounts. The account with the RBI is called a 'Retail Direct Gilt Account'.
Analysts see this move by the government as a step towards increasing its investor base to buy its securities to fund its borrowing program.
This scheme was first mentioned by RBI Governor Shaktikanta Das in his February 2021 monetary policy announcement.
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What are G-secs and which ones are covered?
G-secs are financial instruments issued by the RBI on behalf of the Government of India or various state governments to fund their respective operations. It is the way through which the governments raises debt through domestic investors. The government has a debt obligation towards the holders of these instruments. These instruments are risk-free due to government's sovereign backing.
These instruments are of various forms. The ones that can purchased through RBI Retail Direct are:
- Treasury Bills or T-Bills: These are short-term bonds available in tenures of 91, 182 or 364 days. They pay no interest. Rather, they are issued at a discount (for example ₹95), and redeemed at face value (say ₹100). The return to the investor would be the difference (₹5).
- Dated bonds: These are bonds issued for tenures over one year, and can go upto 40 years. Most bonds issued by the government are dated. The come with tenure and a rate of interest, with the coupon payment (or interest payment) being made two times a year till maturity.
- Sovereign Gold Bonds: Bonds linked to the price of gold, with an eight year tenure. It carries an interest rate of 2.5%
- State Development Loans: This debt is issued by state governments. Interest is serviced half yearly, and the principle repaid upon maturity.
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Primary and secondary market
The primary G-Sec markets deals with those instruments that are being issued for the first time. RBI Retail Direct lets retail investors participate in their issuance through auctions.
Secondary markets are where these G-Secs, once issued, are traded. They can be traded using the RBI's Negotiated Dealing System - Order Matching (NDS OM) which is an electronic and anonymous system that lets participants buy G-Secs and accept orders for securities they currently own. The RBI says that this is open to select institutions such as commercial banks, primary dealers (brokers) and well managed urban co-operative banks and NBFCs. Through RBI Retail Direct, retail participants can now access it too.
Along with RBI Retail Direct, Modi launched the Integrated Ombudsman Scheme, to centralise and streamline the RBI's consumer redressal mechanism, which is currently available through 22 RBI ombudsman offices and 30 Consumer Education and Protection Cells nationwide.