For a long time, trading in government bonds was the preserve of banks, financial institutions and corporations with large treasury operations. In a change that the Reserve Bank of India (RBI) called “major structural reform” in February, our central bank decided to grant retail investors direct access to the domestic market for public debt. So far, only the United States and Brazil have done so. On Monday, RBI explained how people can open “direct retail accounts” on its online platform that could soon be used to buy and sell government securities (G-sec) and also place bids for new issues at primary auctions. takes a few submissions for verification, such as an email address and registered cell phone numbers, taxpayer identity, and a savings account at a bank. Money can be transferred by investors through online banking or UPI, our “unified payment interface” that has let millions of handsets act like wallets. The RBI will only allow one bid per bond, and Indians overseas can invest in G-sec as well, provided no currency exchange rules are violated.
Conceptually, the idea of citizens lending a portion of their own savings to a government in need of funds is elegant. It’s also pragmatic, win-win. Indian savers who complain about the financial crackdown on negative real returns on bank deposits, with inflation hovering above the interest they receive, could now get better rates on even safer debt. It’s a privilege that households also deserve, although well-rated government guaranteed bonds have always been available. If G-sec becomes an investment option, the households accumulating there would surely broaden the Centre’s investor base, potentially facilitating efforts to borrow large sums from the market to fill gaping budget deficits. New Delhi expects to end fiscal year 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 the banks. For G-sec held to maturity, it is the coupon rate that matters, but in a secondary market scenario, the excess supply of bonds pushes prices down, increasing what they “return.” (On cash invested) and increasing the cost of debt for all borrowers. To reduce this burden on Center and others, RBI had to play the big bull itself.
Last April, the RBI launched a formal government securities acquisition program (GSAP) to support bond prices and contain yields, particularly at the long end of the yield curve that has seen the trends of inflation deter other buyers. Without RBI intervention, inflation expectations would increase market returns to compensate for the loss in the real value of the rupee. The suppression of yields made it difficult for G-sec buyers to earn a rate above 6% per annum. While this outweighs the unused money, the popularity of this “class G” asset will depend on the type of publicity given to the G-sec as much as our inflation trajectory, which will determine how rewarding they are. If consumer prices rise, as they threaten now, the RBI should let bond prices fall just enough for yields to exceed inflation and become attractive again. In addition, it must ensure easy liquidation even of odd and tiny lots. Illiquid paper would dampen the enthusiasm of retail in the early stages. RBI has been impressive in moving so boldly to allow individuals to purchase G-sec. If this reform works well, it will help our bond market thrive, perhaps even boost public demand for corporate debt as a longer-term payoff. Inflation must not drop this proposition G.
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