Mumbai: The Reserve Bank of India (RBI) is in talks with bond market participants to increase retail participation in the government debt market.
The central bank may soon mandate Clearing Corp. of India Ltd (CCIL) to develop an online trading platform for government bonds on which movement in yields can be measured in real time and trades can be executed, according to two people familiar with the matter.
Also in the offing could be a lower minimum lot size, from the present Rs10,000, and higher reservation for retail investors in the primary auctions of government bonds.
Currently, up to 5% is reserved for retail investors but there are hardly any takers. The secondary market, in which trading reaches as much as Rs15,000 crore on some days, is also dominated by banks and institutions.
In comparison, at least 40 million retail traders participate in the equity markets.
According to people familiar with the matter, the CCIL platform will be similar to equity trading platforms available through banks and brokerages.
Retail bond investors now trade through a constituents’ subsidiary general ledger (CSGL) account maintained by banks or brokers. This takes time, and the absence of live market feed prevents customers from taking advantage of interest rate volatility.
“RBI is pondering (a proposal) to develop a Web-based platform similar to equity trading,” said a bond trader. “The investor will not only be able to execute orders on a real-time basis through that but can also monitor portfolio and put in some advanced options as they do in equity trading platforms.”
“Retail participation is a must given the increasing size of government debt auctions. In all developed countries, investing in government securities is as easy as investing in equity market,” said the trader, who did not want to be named.
The Indian government is raising Rs4.57 trillion from the market in fiscal 2010-11 to bridge its fiscal deficit.
Bond dealers say most retail investors don’t even know how to invest in the debt market and their best bet are debt funds offered by mutual funds. They also emphasize that low returns on debt instruments is one of the reasons why retail investors, most of whom are day traders, are not interested in that market.
RBI officials have repeatedly been emphasizing the need to increase retail participation. In a recent meeting with bond market participants, including CCIL, details of a Web-based trading platform were discussed.
To start with, the bond trading platform could be a stand-alone product, but in due course it can be integrated with the existing equity trading platform.
A CCIL official, who spoke on condition of anonymity, confirmed that talks are under way to develop a Web-based bond trading platform. “If we get the mandate, based on the requirements involved, we can deliver the platform in a few months.”
Market participants have advised RBI that the minimum lot size be retained at Rs10,000 for now, and lowered over a period of time. This is the same requirement in trading executed through CSGL accounts.
RBI introduced retail participation in bond market in 2000 by reserving 5% of the issued amount for non-competitive bids by retail investors.
Retail trading started in January 2003, according to the Bombay Stock Exchange website. Retail participants can execute their trades through the BSE online trading system, the website says. The exchange is also in the process of introducing Internet trading through the BSE Webx trading system, the website says.
Currently, the settlement of bond trades takes place on a T+2 basis. This means the securities come to an investor’s account two days after the execution of a deal.
It is not clear if the delivery system will change once trading starts on the proposed Web-based platform.