Opening an Account with RBI for Investing?

4 min read
Opening an Account with RBI for Investing?

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Big News!!! Retail investors like you and me will now have greater access to the government bond market via a new direct investment option called as 'Retail Direct' being offered by the RBI itself. Here retail investors can buy and sell government securities directly via accounts held with the central bank.

Whenever you and I need money, we go to the bank to avail a loan. Against this loan, we promise to pay the bank periodic interest & Principal back after a certain amount of time. Likewise, the Government of India also needs money to build roads, bridges, dams, hospitals, etc. When they need the money, they approach to the RBI. The RBI, in turn, auctions the loan in the form of bonds/T-bills that you can purchase. Essentially, you are lending a part of the overall loan the government is seeking. Against this loan, the Government of India, promises to pay periodic interest and also repay the principal at the end of the tenure.

Before we go ahead, 3 things you need to know about government securities are why it is important for you:

  • What are Government Securities (G-Sec)?: These are debt instruments issued by the government to borrow money. The two key categories are treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and dated securities – long-term instruments or simply Bonds, which mature anywhere between 5 years and 40 years.

  • Types and Examples of T-Bills and Bonds:

    Consider a 91-day T-bill. Assume the true value (Par value), is Rs.100. This T-bill is issued to you at a discount to its par value, Say Rs.96. After 91 days, you will get back Rs.100, and therefore you make a return of Rs.4. (Yield 16.71%)

    Bond issued will have a unique name or symbol. The symbol contains all the information you’d need. For example here is a symbol – 790GS2037A (Annualized interest – 7.90%, Type – Government Securities (GS), Maturity – 2037, Issue – ‘A’ means it’s a fresh issue). If you were to invest in this bond, you would receive a 7.9% interest every year until its maturity in 2037. Please note, the interest will be paid semi-annually so that you will get 3.95% interest twice a year. Finally, upon maturity, you will also get back your principal amount.

  • Safety: They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil. It only has interest rate risk. G-Sec are traded on stock exchanges and bond prices may go up and down but if held till maturity, the capital is safe.

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Current System: Presently, entities such as banks, primary dealers, insurers and mutual funds (with trade in lot sizes of Rs 5 crore or more) who maintain a subsidiary general ledger account with the central bank are allowed to become primary members of NDS-OM — RBI's order matching system for secondary market trading in government securities. Individuals or entities who have gilt accounts with the primary members can indirectly place bids through them on the e-Kuber system, which is the core banking solution of the RBI.

Proposed System: It will an opportunity where investors can open gilt accounts with RBI in the e-Kuber system. It would be direct participation in the G-sec market and in the bidding process.

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Why now?

The RBI works debt manager for the government. In the forthcoming financial year, the government plans to borrow whopping Rs 12 lakh crore from the market. When this much demand comes from the government, the price of money (i.e., the interest rate) will move up. It is in the government’s and RBI’s interest to bring this down. That can happen by broadening the base of investors and making it easier for them to buy g-secs. As explained in previous article, borrowing emerged as major part of earning government followed by GST and Income tax.

Source: ET

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“It is proposed to provide retail investors with online access to the government securities market – both primary and secondary – directly through the Reserve Bank (‘Retail Direct’). This will broaden the investor base and provide retail investors with enhanced access to participate in the government securities market. This is a major structural reform placing India among select few countries which have similar facilities,”
-  RBI Governor Shaktikanta Das

Nutshell: The RBI’s move to allow retail participation directly through its platform removes the need for going through intermediaries such as exchanges and brokers to make investments in government securities.

Now if RBI allows investors to open gilt accounts directly through its channel, it will not only improve the access for retail investors by leaps and bounds, but also democratise and facilitate government’s borrowings.

Note: Like bank fixed deposits, g-secs are not tax-free.

Details of the facility and how it will work are awaited.

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Akshay Seth
Research Analyst (SEBI Regd.)
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