Context: Recently, the Reserve Bank of India (RBI) has said that it would allow retail investors to open gilt accounts with the central bank to invest in government securities directly and without the help of intermediaries.

Why such a move?

• The RBI is the debt manager for the government.
• In the forthcoming financial year, the government plans to borrow Rs 12 lakh crore from the market.
• When the government demands so much money, 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 only happen by broadening the base of investors and making it easier for them to buy g-secs.

What are Government Securities?

• It is a tradeable instrument issued by the Central Government or the State Governments.
• The government securities market is dominated by institutional investors like mutual funds, banks, insurance companies.
• These are debt instruments issued by the government to borrow money.

The two key categories are:

1. Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days, and
2. Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years

Note: T-Bills are issued only by the central government, and the interest on them is determined by market forces.

In India, the Central Government issues both, treasury bills and bonds or dated securities while the State Governments issue only bonds or dated securities, which are called the State Development Loans (SDLs).

• G-Secs are called risk-free gilt-edged instruments because practically they carry no risk of default.
• G-Secs offer the maximum safety as they carry the Sovereign’s commitment for payment of interest and repayment of principal.
• G-Secs can be sold easily in the secondary market to meet cash requirements.

Significance of G-Secs for Retail Investors

• The Central Bank has proposed to provide retail investors with online access to the government securities market (both primary and secondary) directly through the Reserve Bank (Retail Direct).
• Primary markets are the financial markets where a security is issued for the first time.
• Secondary markets are the ones where buying and selling of already issued securities takes place.
• The move will broaden the investor base and provide retail investors with enhanced access to participate in the government securities market.
• It is a major structural reform placing India among select few countries which have similar facilities.
• The directly buying of G-secs by retail investors alongwith HTM [hold to maturity] relaxation, will facilitate smooth completion of the government borrowing programme in 2021-22.
• It is a bold step towards the financialisation of a vast pool of domestic savings and could be a game-changer.
• It allows retail investors to directly invest in the safest fixed income avenue in the country and gives an alternative safer than bank fixed deposits as G-secs come with a sovereign guarantee.