India opens up bond market to retail investors

A new investment avenue is available to retail investors with India’s central bank allowing them to invest in government bonds for the first time.

The Reserve Bank of India has opened up the government securities market for retail investors by permitting them direct online access to the government bonds market.

India is the first Asian country to allow direct retail participation in the government securities market.

Only a few countries, including the US and Brazil, permit retail investors direct access to government bonds, both primary and secondary.

“Retail investors can now directly buy and sell government bonds, also called gilts, online. With this, more investment instruments are open for retail investors; besides bank fixed deposits, fixed income mutual funds and government small savings schemes such as public provident fund,” said Binoo Nayyar, chief financial officer at TrendRiser Securities, Dubai.

The access to both the primary and secondary markets is allowed directly through the central bank, which has allowed retail investors to open gilt or G-sec accounts on a platform called Retail Direct.

Explaining the procedure for opening a bond account, Nayyar said: “Investors can open a gilt account in the central bank’s electronic platform E-kuber. Retail investors can place a direct bid with the NDS-OM, an electronic anonymous order matching system for secondary market trading in government securities.”

Ease of access

The interest rates on government securities are higher than bank fixed deposits (FD) across certain tenors.

Currently, FD rates hover around 5-5.5% per annum.

Besides the higher interest rates, the government bonds offer sovereign guarantee, which means they are safe investments with the government of India guaranteeing full repayment on maturity.

Bank deposits and fixed deposits with banks do not offer sovereign guarantee. They are insured only up to INR500,000 (£4,908, $6,891, €5,677) with the Deposit Insurance and Credit Guarantee Corporation.

The move is part of the central bank’s efforts to increase retail participation in government securities and to improve ease of access for these investors.

This access will broaden the investor base and provide retail investors with opportunities to participate in the government securities market.

More than being a safe investment for retail investors, the move will also deepen the bond market in India.

There’s better option

Though NRI investors have shown much interest in the new investment instrument, not all advisers favour investments in government gilts.

They advise retail investors go for gilt mutual funds rather than direct investments in gilts for one reason – that it’s easy to encash gilt mutual fund units while it is relatively difficult to liquidate direct investments in gilts.

Sajith Kumar PK, chief executive and managing director, IBMC Financial Professionals Group, Dubai,  said it is yet to be seen if there will be liquidity for retail investors who buy these gilts which offer more interest rates than on fixed deposits.

Still, fixed deposits are preferred by average NRI investors, maybe because of unfamiliarity with the bond market.

Instead, they should go for the gilts which offer sovereign guarantee as well as higher interest rates.

​​“Direct investment in gilts is suitable for investors who are looking for investments with high safety level. They should remain invested in gilts till maturity,” he said.