Middle-class savings could now go into directly buying government bonds after the central bank Monday allowed retail investors to buy into sovereign debt through dedicated accounts that wouldn’t attract costs. Ticket sizes for such investments could be as low as Rs. 10,000.
Before the year end, the final details of the retail account plans are expected to be made public, said a source familiar with the matter.
The Reserve Bank of India (RBI) did not respond to ET’s queries.
Advisors believe some tax incentives could make retail purchases of sovereign debt a huge success. Liquidity or ease of selling and buying papers is given for transactions that should be limited to lakhs of rupees.
“This will develop benchmarks for retail investors across segments and tenures,” said Soumyajit Niyogi, associate director at India Ratings. “Subsequently, it will provide bargaining power to investors and depositors. To develop the retail segment, market making is necessary, and for that both incentives and nudging are needed for the respective stakeholders.”
For instance, the 364-day Treasury Bill, or shorter duration sovereign paper, offers less than 4 per cent compared with 4.5-5 per cent for one-year bank fixed deposits. An income tax incentive will help narrow or erase this differential.
An individual can pledge sovereign bonds to raise a loan, a first of its kind feature available with investments in government securities.
Different maturity papers are expected to be available to individuals. When interest rates tend to peak out, this will help savers lock in at a high rate over a long period – 20, 30 or 40 years – through dated sovereign securities.
This in turn would likely prompt banks and mutual funds to design competitive rates. Investors will be ultimate beneficiaries obtaining higher interest on investments.
“The idea of retail participation opens up a future potential buyer for government bonds,” said Rahul Bajoria, chief economist at Barclays India. “We need operational ease of access to tap public savings as the product should ideally be one-click away. India becomes one rare country giving direct access to retail investors buying/selling sovereign papers.”
On Monday the RBI opened a dedicated bond-buying window for retail investors. Individual savers can now buy and sell bonds through the “Retail Direct Gilt (RDG) account” at the central bank.
Some argue that top banks could have been asked to offer gsecs in dematerialised format. Individuals may struggle to decipher an RDG account.
“Liquidity is a key lubricant to make this a success,” said Virkam Dalal, managing director at Synergee Capital. “The authorities need to go the extra mile to create awareness about the product.”
Primary dealers or bond houses could be involved initially in market making. If an individual wishes to buy a 40-year paper, a bond house should be able to sell it by shorting them. A primary dealer can later source the stock of securities in a primary sale.
“Individuals may also need to be incentivized with possible tax-breaks to compete efficiently with other investment products,” said Bajoria.
