Promoting G-Secs

| Updated on November 16, 2021

G-Secs as a retail investment option is a good idea; tax breaks will make them more attractive

The launch of the Retail Direct Scheme by the Reserve Bank of India appears to be aimed at broad-basing participation in the sovereign bond market to improve the demand for these securities. This is a step in the right direction as ploughing part of household savings to government bonds will be beneficial to the exchequer; small investors will also be able to access a secure investment avenue that promises stable returns over long term. It needs to be noted though that retail investors can already participate in both primary and secondary markets for government securities through their stock broker or through NSE’s Gobid or BSE Direct platform and mobile app. In this route, applications of retail investors are consolidated to bid in the weekly G-Sec auctions in the non-competitive segment. The bonds purchased are moved to investor demat accounts, and they can be bought and sold in the secondary market platform on stock exchanges as well. But the response of retail investors to the exchange route for investing in government bonds has been quite tepid and volumes in the secondary market are also quite low.

The Retail Direct Scheme is an additional channel now available to retail investors, but it is quite similar to the exchange route. The central bank is inviting small investors to open a retail direct gilt account with it through an online portal and participate in the primary market through the non-competitive scheme; Clearing Corporation of India Ltd is to act as the aggregator of these bids and participate in the auction. Retail investors are being asked to access secondary market through the NDS-OM platform. Since the objective is to make more retail investors participate in gilt securities, there is no harm in making multiple channels available to them, but there are many challenges in making smaller investors invest directly in gilt securities. One, government bonds carry interest rate risk and can result in capital loss, if they are not held till maturity. Two, there are other options with sovereign guarantee and higher returns currently available among small saving schemes and RBI bonds. Three, small investors find it relatively harder to understand debt securities when compared to equities as data on retail holding in mutual funds reveal.

That said, government securities are definitely apt for risk-averse investors looking for very safe investment option where interest can be locked for tenures over 10 years, for instance as retirement savings vehicle. The Centre should run an awareness campaign on government bonds, educating investors about the interest rate risk as well as their superiority as long-term investments. One way to garner investor interest would be to offer income tax deductions for these instruments or to make tax treatment of direct gilt investing similar to taxation of debt mutual funds. While the Centre may not succeed overnight, it should continue its efforts in this direction.

Published on November 16, 2021

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