RBI wants retail investors in govt bonds; here's what it means according to experts

In the latest monetary policy, the Reserve Bank of India (RBI) governor said that the RBI is going to allow direct access to retail investors to buy government bonds. He described it as structural reform, a revolutionary step.

It is going to be the direct retail access, which means investors can register with the RBI itself and get access to both an IPO of government bonds as well as participation in the secondary market.

This is a revolutionary step because from the RBI’s point of view, from the country’s point of view it increases the number of people who participate in government auctions, it will place India in a select few countries, which allow this facility and very importantly this enhances access.

Hitendra Dave of HSBC, Ananth Narayan, Professor at SPJIMR, and G Padmanabhan, former executive director at the RBI, spoke to CNBC-TV18 about how can RBI ensure retail investment in government bonds and will it succeed.

Dave said, “This is a significant step that RBI has taken, I certainly agree with that statement that it is a structurally significant step forward. My own enthusiasm is conditional on how the final scheme rolls out. The kind of steepness that we currently have, so I hope they launch it quickly because there are good times to launch a product and there are not so good times this looks like a good time anyway market is exhausted with the supply.”

He said, “I hope it is not made for pure retail, it is not focused only on pure retail. Fixed income markets globally are underpinned by the big boys, so I hope they are very liberal in their definition of who can participate in this direct accounts - Hindu Undivided Family (HUF), family, offices, people with large amounts of money that is one.”

Ananth Narayan said, “One of the reasons why we have been discussing this retailing of government securities for a long time and it has not worked out, as you rightly pointed out there are much better instruments available right now, including your small savings. Now today you have RBI savings bonds as well, you have the Bharat ETF, etc. which provide much higher returns and there is an anomaly which we have been living for a long time, the taxation if I go through a gilt fund is very different and more advantageous.”

“On the repo part I would urge some huge amount of caution, this is not for normal retail, this is a leveraged product, this is a risky proposition and I will tell you what the risk is. You are buying a 5-year bond and you are funding it on an overnight basis so you are making a spread between Rs 575 and Rs 350 or whatever the rate is on an overnight basis but you are running a market risk and interest rate risk because you are carrying a long duration asset on your books and the price of that instrument can change as interest rates change.”