RBI panel moots centralised market maker to boost retail participation

Bank branches and post offices could be used as distribution channels to get retail investors to invest in government securities, according to a Reserve Bank of India panel.

Further, investment in government securities (G-Secs) will become attractive for retail investors if the interest rates offered on various small savings instruments are aligned with the rates yields of G-Secs of comparable tenors.

As retail investors currently have to pay large illiquidity premium when they try to sell illiquid securities, the panel said this issue could be addressed by involving primary dealers (PDs) in the market-making mechanism.

The Working Group on Enhancing Liquidity in the Government Securities and Interest Rate Derivatives Markets was headed by R Gandhi, Executive Director, RBI.

A Government security is a tradable instrument issued by the Central Government or the State Governments. It acknowledges the Government’s debt obligation.

Along with efforts to promote market making in the retail market through PDs, the RBI may also consider, in the long-term, having a centralised market maker for retail participants in G-Secs, the Group suggested.

The centralised market maker would quote two-way prices of G-Secs for retail/individual investors and leverage on existing and future infrastructure for reaching retail/individual investors.

The Group wants standardisation of transaction costs as it can lead to tangible benefits in promoting retail investments. Accordingly, the RBI may consider prescribing uniform charges for opening and maintaining of gilt accounts and for putting through each transaction.

As an additional measure to ease the burden of transaction cost on individual investors, the RBI may consider waiving off the settlement charges for all retail transactions that are put through either the negotiated dealing system (NDS) or NDS-Order Matching.

Even though G-Secs are available for trading in the stock exchanges, secondary market activity in G-Secs on the exchanges have been negligible.

Considering the reach and familiarity of the exchange platforms, promotion of trading in G-Sec on the exchanges can be a means of activating retail interest in G-Sec, the Group said.

Some of the factors that inhibit activity in the exchanges are the absence of banks/PDs from the exchanges and the operational difficulty in converting G-Sec from Securities General Ledger (SGL) form to demat form.

The Group recommended simplification of operational procedures for seamless movement of securities from SGL form to demat form and vice versa to promote trading of G-Sec on stock exchanges.

Further, it also wants banks and PDs to be permitted to obtain limited membership of stock exchanges for undertaking proprietary trades in G-Sec on the exchanges.

Since inflation affects the poor and middle class significantly, the Government may consider issuing inflation-indexed bonds specifically for retail/ individual investors.

The Group suggested that such bonds may be subject to suitable investment cap to pre-empt them from being available to high networth individual and institutional investors.

ramkumar.k@thehindu.co.in

(This article was published on August 14, 2012)
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