BackGovernment bonds for household folks at last
An idea awaiting action, sovereign debt for retail investors can be a win-win, a worthy deal for both buyers and sellers in a newly-opened market. Inflation, though, could prove ruinous
PremiumFor long, government-bond trading was the preserve of banks, financial institutions and corporate houses with large treasury operations. In a shift that the Reserve Bank of India (RBI) called a “major structural reform" this February, our central bank decided to grant retail investors direct access to the domestic market for government debt. So far, only the US and Brazil had done this. On Monday, RBI outlined how people can open ‘retail direct gilt accounts’ on its online platform that could soon be used to buy and sell government securities (G-secs) and also place bids for fresh issuances in primary auctions. All it takes are a few submissions for verification, such as an email address and numbers for a registered mobile phone, taxpayer identity and a savings account at a bank. Money can be transferred by investors via internet banking or UPI, our ‘unified payments interface’ that has let millions of handsets act as wallets. RBI will permit only one bid per bond, and Indians abroad can invest in G-secs too, provided no foreign-exchange rule is violated.
Conceptually, the idea of citizens lending a government that’s short of funds some of their own savings is elegant. It is also pragmatic, a win-win. Indian savers who grumble about the financial repression of negative real returns on bank deposits, with inflation trending above the interest they earn, could now get better rates on still-safer debt. This is a privilege that households deserve, too, though well-rated state-backed bonds have always been available. If G-secs catch on as an investment option, households piling into them would surely widen the Centre’s pool of investors, potentially easing efforts to borrow large sums from the market to plug yawning fiscal deficits. New Delhi expects to end fiscal 2021-22 with total borrowings of ₹12 trillion, a sum so huge that RBI, its debt manager, has had to worry about the adequacy of demand for government paper, despite having partly-captive buyers in banks. For G-secs held to maturity, it’s the coupon rate that counts, but in a secondary market scenario, excess bond supply pushes down prices, upping what they ‘yield’ (on cash invested) and raising the cost of debt for all borrowers. To keep this burden on the Centre and others down, RBI has had to play the big bull itself.
Just this April, RBI embarked upon a formal government securities acquisition programme (GSAP) to support bond prices and contain yields, especially at the long-tenure end of the yield curve that has seen inflation trends deter other buyers. Without RBI intervention, expectations of inflation would raise market yields to make up for the rupee’s loss of real value. Yield suppression has made it difficult for G-sec buyers to get a rate above 6% per annum. While this beats money kept idle, how popular this ‘G-class’ asset comes to prove would depend on the kind of publicity G-secs are given as much as our inflation trajectory, which will determine how rewarding they are. If consumer prices get escalative, as they now threaten to, RBI should let bond prices slide just enough for yields to rise above inflation and look attractive again. Further, it must ensure easy liquidation even of odd-lot and tiny holdings. Illiquid paper would dampen retail enthusiasm at the very onset. RBI has been impressive in moving so boldly to let individuals buy G-secs. If this reform works out well, it will help our bond market flourish, maybe even stir up public demand for corporate debt as a longer term spin-off. Inflation mustn’t let this G-proposition down.
Unlock a world of Benefits! From insightful newsletters to real-time stock tracking, breaking news and a personalized newsfeed – it's all here, just a click away! Login Now!
