25 Nov 2021  |   06:01am IST

RBI Retail Direct Scheme: Is it a good idea?

RBI Retail Direct Scheme: Is it a good idea?

Nine months after the suggestion was first notified, India’s $1.1 trillion sovereign bond market has ultimately unbolted to individual investors. This year on November 12, Prime Minister Narendra Modi introduced the Reserve Bank of India (RBI) Retail Direct Scheme, which grants individual retail investors direct admittance to buy and sell government securities (G-Secs).

G-Secs are Government Bonds that have a very low risk of default and consequently little yields.When an investor purchases G-Secs that investor is a creditor lending funds to the government. Fundamentally, the scheme allows individuals to lend to the government head-on, unlike in the past when mediators like banks, insurance companies or mutual fund houses would contribute to the G-Secs on behalf of customers. On every Friday, the government’s debt manager, that is the RBI, auctions G-Secs, and registered users can purchase these risk-free bonds at no extra costs.

While launching the scheme, the PM said that small investors of India now have a secured mode of investment in government securities and the scheme will enlarge the span of investment in the country and make admittance to capital markets simpler and safer for investors. The Governor of RBI, Shaktikanta Das in his February 2021 monetary policy shad recommended the retail direct scheme permitting retail investors direct access to G-Secs.

A primer on RBI’s scheme: The scheme is a gateway that enables investment in government securities by individual investors. The scheme permits retail investors to buy and sell G-Secs online, both in the primary and secondary markets. As per the information offered by the RBI, these small investors can now invest in G-Secs by opening a gilt securities account with the RBI on www.rbiretaildirect.org.in The account opened will be called Retail Direct Gilt (RDG) Account. As per the RBI notification, to open the RDG account a retail investor should have a PAN card, a savings bank account maintained in Indian currency, any approved legal document for Know Your Customer (KYC) purposes. In addition, a retail investor should have a valid email identity and a registered mobile number.

Participation and allotment of securities will be according to the non-competitive scheme. Only one bid per security is allowed and the total amount to be paid will be shown on submission of the bid. Payment to the collector or receiving office can be made through net banking or UPI service from the connected bank account, whereby funds will be debited at the time of submission of bids on the portal. The secondary market transaction link can be accessed on the online portal by registered investors to purchase or sell the G-Secs through Negotiated Dealing System – Order Matching System (NDS-OM) which is an RBI trading system. Investors will receive interest or maturity earnings in their savings bank accounts connected to the RDG account.

To buy the government bonds, before the beginning of the trading session or during the session, the investor should transfer funds to the selected account of Clearing Corporation of India NDS-OM. The buying limit (funding limit) will be given for placing the ‘buy’ orders depending upon the actual transfer or success message. Any surplus funds lying to the credit of the investor will be refunded at the end of the trading session.

Two shades of the scheme: Although now retail investors can invest in G-Secs easily, allocating funds without bearing in mind the pros and cons can be useless. G-Secs carry minor risk compared to other types of assets such as equities, as the returns are assured by the government. By holding on to the G-Secs until maturity, one can quash market-linked risks associated with them. The government gives a fixed interest rate on the G-Secs.

However, investing in G-Secs has numerous drawbacks. Theoretically, G-Secs provide sufficient liquidity as the demand from big financial organizations is high. But these financial organizations purchase in large volume and it is not practicable for a retail investor to dispose of her or his holdings to banks and insurance entities. Moreover, the secondary market for G-Secs is not completely grown, which decreases the liquidity of G-Secs. The yield or income received on G-Secs is quite less in comparison to other classes of assets. Importantly, G-Secs are long-term investment instruments and they might lose their value over the period. 

As a final point, though the scheme is a step in the proper route to attract the portion of household savings to G-Secs, the government should tackle many challenges prudently. The government should organize an awareness campaign on G-Secs educating investors about the interest rate risk along with their advantage as long-term savings. One path to acquire investor attention would be to provide income tax deductions for these instruments or to make the tax treatment of direct gilt investing similar to taxation of debt mutual funds. Nonetheless few important questions such as considering the avenues of investment namely insurance products, PF, NPS etc which have heavy exposure to G-Secs, and investors can purchase G-Secs through them, what sensible facility will the RBI Retail Connect offer? Why does the RBI generate this retail investor armor against SEBI-controlled retail trading of G-Secs? remain unanswered. Thus, the government and the RBI should work hard to remove the bottlenecks of the scheme. Otherwise, the scheme won’t be a masterstroke.

(The writer is a tax specialist, financial adviser, guest faculty and public speaker based in Goa)


Idhar Udhar