G-secs for retail: Will RBI invite retail investors at repo deals?

The RBI in its policy last week, announced it will allow retail investors to open an account with the RBI and buy, own and sell government securities. Right now this is possible via stock exchanges, but it hasn’t taken off.

One can see some obvious problems for this to take off:

The return on G-Secs is a good 1 to 2 percentage point less than on many other sovereign backed savings such as NSC, PPF, bonds of AAA PSUs, Public sector bank FDs

Retailers holding these bonds may find them less liquid than say gilt mutual funds, which themselves haven’t been very popular.

Holding G-Secs via mutual funds, gives indexation benefits and hence one gets taxed less than if one owns G-Secs directly.

One point of view that emerged from Hitendra Dave of HSBC was that this product should be opened to HNIs and family offices. He said this can succeed if it can be made a big-investor product and the securities made repo-able. That is, an HNI opens his account in a bank as a Constituents’ Subsidiary General Ledger Account. He can keep the G-Secs he buys as collateral with the bank to get maybe 10-15 times leverage. The bank in question can lend the securities in the tripartite repo (the old CBLO) market and earn more. The combined earnings for the investor, after paying the bank a fee can still be in high single digits or even double digits. Then it compares favourably with the competition.Ananth Narayan’s objection was the product is inherently risky with the investor using ultra-short-term money to take a long term bet. Assuming the investor has the appetite, this still doesn’t answer the quest to bring new investors into G-Secs, which was the purpose of announcing the scheme. The repo-ability brings exposure to gilts back to the banking system.G Padmanabhan, former ED of RBI was convinced the RBI would not be open to allowing repo-ability. The governor’s announcement was for a more simple product, access to safe investment, more useful to the central bank and the government than the investor.Some others have raised doubts whether the RBI will be nimble in opening accounts, issuing bonds instantaneously, providing market-making etc any time soon. Their assessment is RBI is probably putting up its fences because it sees a turf war. Exchanges are aching to increase volumes in their G-Sec segment. They have been demanding the right to offer derivatives based on g-secs, as also inter-operability between depositories to enable easy and widespread trading. Based on their demands SEBI is ready with a plan for wider exchange-based retail trading of g-secs and interest rate derivatives. RBI’s announcement on Friday was more to establish its turf and not allow exchanges and SEBI to get meaningfully into g-sec trading.