📈 A New Avenue for Investments?
The government is finally making it easier for retail investors to invest in government bonds. Here's how.
Good news for retail investors! Thanks to the RBI's Retail Direct Scheme, investing in government securities and bonds will get easy-peasy from November 12, 2021. Looks like a Diwali gift from the government.Â
Before we dig deeper and understand how the scheme works, let us understand why retail investors couldn't access India's $1.1 trillion bond market.
Government Securities and Bonds
Government securities and bonds are basically debt instruments through which the government raises funds. So, by buying government securities, you can directly lend to the government!Â
But, these securities are traded in lots of Rs. 5 crores or more. Most retail traders do not want to block such a huge amount in one investment, especially one that has historically given low-interest rates. The current 10-year interest rate on a G-Sec (short for Government Security) is 6.11%. The government also knows this, which is why so far it has focused on facilitating bond trading mostly for high net worth individuals and other financial institutions.
Also, even if an investor wanted to buy government securities, there was no direct way for them to do so. They had to buy them through stock exchanges or other intermediaries.
Even if some ended up buying these instruments, they had no marketplace to sell them easily. On the other hand, large institutional investors could easily trade securities even in the secondary market, thanks to the Negotiated Dealing System - Order Matching (NDS-OM). This is an online portal managed by the RBI which makes trading government bonds and securities as simple as trading stocks.
Retail investors be like:
The Government's New Scheme
Now the government has decided to stop treating retail investors like step-children and is allowing them to participate in India's bond market. But before you think it's only our government that practised this sautela (step-parent-like) behaviour, let us tell you India is the first Asian country to reverse it too! In fact, only a handful of other countries like the US, the UK and Brazil allow such direct investments in the bond market.Â
But, if a major chunk of the population isn’t investing in the government, how is it getting adequate funds? Well, retail investors can indirectly invest in government securities through insurance or debt mutual funds. But these middlemen usually charge a commission, which is practically a waste and can be eliminated.
So, under the new scheme retail investors will be able to open an account with the RBI and directly buy government securities from them. And they will also be able to access the exclusive NDS-OM, so secondary market trading will also be easy now.
Why Did the Government Change its Mind?
But why is the government introducing this scheme now? Simple, because it needs cash. The government wants to borrow Rs. 12 lakh crores in FY 21-22. And the only way it can get this cash is if more people buy government securities. So, it had to make the trading system easier.
But will investors be interested in buying government bonds directly? Many investors may not want to do so right now as the interest rates are super low.
The low-interest rate was to allow people to borrow money easily amid the pandemic and keep cash flowing. But now that lockdowns are over, interest rates are bound to increase soon.Â
All in all, the government has taken a bold step by allowing millions and millions to freely trade in the bond market. But is this step enough? Only time will tell…
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