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Retail Direct: By Enabling Direct Purchase of Government Securities, RBI has Unlocked the Power of Retail Investors

The RBI has proposed to provide retail investors online access to the government securities market – both primary and secondary – directly through the Reserve Bank of India. The facility of buying government securities directly though RBI is to be called Retail Direct.

Coming a few days after the Aatmanirbhar Bharat ka Budget wherein the Modi government announced several major structural reforms to boost financial and capital markets, RBI has announced another major reform that unleashes animal spirits and expands the securities market of India.

Announcing Retail Direct, RBI Governor Shaktikanta Das said that carrying this structural reform places India among select few countries which have similar facilities. This will give retail investors a safe and direct source of investment and provide more funds to government while democratizing government borrowings.

What are Government Securities?

A Government Security (G-Sec) is a tradeable instrument issued by the Central Government or the State Governments. Such securities, when they are short term, and are popularly called treasury bills, with original maturities of less than one year. Long term instruments are generally called Government bonds or dated securities, with an original maturity of one year or more.

In India, the Central Government issues both treasury bills and bonds or dated securities, while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs). G-Secs carry practically no risk of default, and hence, are called risk-free gilt-edged instruments.

Government securities carry the highest safety as far as principal and interest payment is concerned. The coupon rate or the interest rate that the G-sec carries will be what you get if held till maturity of the bond.

How Will It Benefit Retail Investors?

The government has already taken a lot of measures to improve retail investor participation in government securities, including the introduction of non-competitive bidding in primary auctions, permitting stock exchanges to route primary purchases, and allowing a specific retail segment in the secondary market.

Now, the RBI has proposed to increase it further and provide retail investors with online access to the government securities market directly through the Reserve Bank of India.

This move will now broaden the investor base further, and provide retail investors with enhanced access to participate in the government securities market.

As Economic Times reported, this move allows retail investors to directly invest in the safest fixed income avenue in the country, and gives an alternative safer than bank fixed deposits as G-secs come with a sovereign guarantee. Deposits with banks are only insured up to ₹5 lakh per depositor under the Deposit Insurance Credit Guarantee Scheme (DICGS). It is likely that the move will especially suit pensioners looking for a safe investment option that can give them assured returns for the long term.

Speaking to Bloomberg Quint, Dhruv Mehta, independent financial advisor and chairman of Federation of Independent Financial Advisors said that RBI allowing investors to open gilt accounts directly through its channel will not only improve the access for retail investors by leaps and bounds, but also democratise and facilitate government’s borrowings.

We saw the power of Retail investors in the United states via during the GameStop Short squeeze incident. Now RBI will ensure proper utilisation of spending power of the Indian retail investor with opening of Direct Retail!