RBI Just Allowed Retail Investors Direct Access To G-Secs: Here Are Their Special Features, How They Are Settled

In another major structural reform, the Reserve Bank of India (RBI) today (5 February 2021) decided to give retail investors direct access to government bonds and securities, known as G-Sec, in primary and secondary markets.

Announcing RBI’s monetary policy, Governor Shaktikanta Das said retail investors can open the accounts for trading in G-Secs directly with the central bank.

This makes India among the chosen few countries that allows retail investors to trade in government securities.

On 5 February, Economic Affairs Secretary Tarun Bajaj said that the Narendra Modi government was working on including the sovereign bonds in global bond indices by the end of the next fiscal.

The RBI's latest move is on the heels of this statement.

What Are Features Of G-Secs?

According to the RBI, G-Secs are a tradable instrument issued by the Union government or a state government, acknowledging its debt obligation.

G-Secs are of short term maturing within a year or long term that are called government bonds with maturity of a year or more.

They are available in a wide range of maturities from 91 days to as long as 40 years to suit the duration of varied liability structure of various institutions and investors.

The Union government issues both these, while states issue only bonds, called state development loans.

Why Invest In G-Secs?

Holding of cash in excess of the day-to-day needs does not give any return. Investments in assets such as gold have attendant problems such as appraising their purity, valuation, warehousing and safe custody, etc.

In comparison, investing in G-Secs provides advantages such as ensuring return in the form of coupons (interest). G-Secs offer maximum safety as they carry the government’s commitment for payment of interest and repayment of principal.

G-Secs can be sold easily in the secondary market to meet cash requirements. They can also be used as collateral to borrow funds in the repo market where financial institutions borrow cheaply from banks .

Some G-Secs such as state development loans (SDLs) and special securities (oil bonds, UDAY bonds etc) provide attractive yields.

Simple Settlement System

The settlement system for G-Secs trading is based on delivery versus payment, which is simple and safe. This ensures transfer of securities by its seller simultaneously with transfer of funds from the buyer of the securities, thereby reducing the settlement risk.

G-Sec rates are readily available due to a liquid and active secondary market and a transparent price dissemination mechanism.

Banks, insurance companies, large investors, smaller investors such as co-operative banks, regional rural banks, and provident funds are also required to hold G-Secs.

The Principle Behind G-Secs

Whenever the Union government needs money, it borrows through the RBI, which is its banker. The central bank avails of the money from banks, insurance companies and mutual funds and then hands it over to the government.

In return, the RBI issues G-Secs of a specific tenure. Once the tenure ends, the borrowers surrender them to get their money back.

G-Secs are issued through auctions conducted by RBI and they are conducted on the electronic platform called the E-Kuber, the core banking solution (CBS) platform of RBI.

Individual investors wanting to bid for the G-Secs can do it through their banks which are members of E-Kuber, the bidding platform.

Commercial banks, urban cooperative banks, dealers, insurance companies and provident funds are members of E-Kuber. Results of the bids will be announced at the stipulated time.

G-Secs are sovereign rated and are considered to be better than — an AAA rating.