RBI’s retail direct gilt plan: Key advantages and challenges

The facilitation in terms of rupees will be done by the CCIL – the RBI itself directly does not handle it but RBI will be opening your account, so the KYC etc will be done by the RBI’s staff.

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The big thing is that for the government, there is a rival source of buyer of bonds. Until now they're seriously dependent on banks and besides banks, maybe a little bit by insurance companies and mutual funds. Now, if retail comes in, that's a big one.

Also, in India there's a lot of money in the banks and therefore, so will some of it find its way into government securities? Rs 150 lakh crore is approximately the total deposits in the banking system, whereas, the amount of government securities and even if you count corporate bonds, it doesn't even come to Rs 100 lakh crore. So, this market can find more buyers, but will it?

The challenge is 10 year G-SEC today gives you 6.3 percent and if you're in the highest tax bracket, you even have to pay taxes on it. What is the rival? Small savings. Any small saving will give you more easily 7 percent plus, and no immediate tax in some of them.

The other comparison would be - small savings is not liquid. You want to immediately liquefy money, you would go to a debt mutual fund, wouldn't you? There after three years, the interest itself is capitalized and you have only a 20 percent tax, if you wait it out for three years. So this is the kind of competition in terms of returns that the government securities retail market will face.