RBI’s Retail Direct Scheme

• 13 Nov 2021

Why in News

Recently, the Prime Minister has launched the Reserve Bank of India (RBI)- Retail Direct Scheme to open up the Government bond market for the retail investors.

Key Points

• About:
  
  • In February 2021, RBI proposed to allow retail investors to open gilt accounts with the central bank to invest in Government securities (G-secs) directly.
  • Under the scheme, retail investors (individuals) will have the facility to open and maintain the ‘Retail Direct Gilt Account’ (RDG Account) with the RBI.
    
    • Retail Investor is a non-professional investor who buys and sells securities or funds that contain a basket of securities such as mutual funds and Exchange Traded Funds (ETFs).
    • A Gilt Account can be compared with a bank account, except that the account is debited or credited with treasury bills or government securities instead of money.
  • The scheme places India in a list of select few countries offering such a facility.
• Aim:
  
  • The move is aimed at diversifying the government securities market, which is dominated by institutional investors such as banks, insurance companies, mutual funds and others.
    
    • While foreign portfolio investors were allowed to invest in G-secs, their holding is around 2-3% in the overall market.
• Scope:
  
  • It offers a portal avenue to invest in Central government securities, treasury bills, State development loans and sovereign gold bonds.
  • They can invest in primary as well as secondary market government securities markets.
    
    • Negotiated Dealing System-Order Matching Segment (NDS-OM) means RBI’s screen based, anonymous electronic order matching system for trading in Government securities in the secondary market.
• Significance:
  
  • Building an Atmanirbhar Bharat:
    
    • So far, in the government securities market, small investors class, salaried class, small traders had to invest through banks and mutual funds in an indirect manner.
  • Improved Ease of Access:
    
    • It will make the process of G-sec trading smoother for small investors therefore it will raise retail participation in G-secs and will improve ease of access.
  • Facilitate Government Borrowings:
    
    • This measure together with relaxation in mandatory Hold To Maturity (securities that are purchased to be owned until maturity) provisions will facilitate smooth completion of the government borrowing programme in 2021-22.
  • Financialise Domestic Savings:
    
    • Allowing direct retail participation in the G-Sec market will promote financialisation of a vast pool of domestic savings and could be a game-changer in India’s investment market.
• Other Measures Taken to Increase Retail Investment in Government Securities:
  
  • Introduction of non-competitive bidding in primary auctions.
    
    • Non-competitive bidding means the bidder would be able to participate in the auctions of dated government securities without having to quote the yield or price in the bid.
  • Stock exchanges to act as aggregators and facilitators of retail bids.
  • Allowing a specific retail segment in the secondary market.
    
    • The secondary market is the market where investors buy and sell securities they already own.
    • Primary market deals with new securities being issued for the first time.

Government Security

• A G-Sec is a tradable instrument issued by the Central Government or the State Governments.
• It acknowledges the Government’s debt obligation. Such securities are short term (usually called treasury bills, with original maturities of less than one year- presently issued in three tenors, namely, 91 day, 182 day and 364 day) or long term (usually called Government bonds or dated securities with 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.
  
  • Gilt-edged securities are high-grade investment bonds offered by governments and large corporations as a means of borrowing funds.

Source: TH