You May Soon Be Able To Buy G-Secs Through Stock Exchange

In the 4th October bi-monthly policy meet, the Reserve Bank of India highlighted the fact that it has taken several measures to diversify the base of G-Sec (Government Security) investors over the years - including the modification in the Government Securities Act, 2006, the introduction of odd lots in the secondary market, improvements in the settlement mechanism, the retailing of G-Secs by primary dealers, and the introduction of non-competitive bidding in primary auctions.

Traditionally, the G-Sec investor base in India has comprised of banks, provident funds, insurance companies, co-operative banks, regional rural banks, pension funds, mutual funds, and NBFCs. There is, however, very little retail participation in the G-sec market.

In more mature markets, retail demand for G-Sec’s is considered critical, as they contribute to a stable demand for government securities, which can cushion the impact of institutional and FII selloffs during volatile times.

The Union Budget 2016-17 had previously announced that the RBI would facilitate retail participation in the primary and secondary bond market through stock exchanges. This month’s policy meet built on that announcement, by stating that “specified stock exchanges, in addition to scheduled banks and primary dealers, will be permitted to act as aggregators/facilitators for retail investor bids in the non-competitive segment for the auction of dated securities and treasury bills of the Government of India”

The RBI also stated that final guidelines related to this would be issued by the end of the month.

Although widely perceived to be “risk-free” in nature, G-Sec’s do in fact display significant price volatility in the wake of changes in underlying interest rates in the economy. Retail investors will need to acquaint themselves with these risks before they invest, and the RBI will need to take adequate measures to educate the investing populace about them as well.

Currently, the 10-year G-Sec yields are trading in the 6.7% range, meaning that an investor who buys a G-Sec maturing in 2027 and holds it until maturity will earn an annualized return of approximately 6.7%, unless the low probability event of a sovereign default materializes. However - retail investors who intend to sell off their bonds prior to their maturities, may be in for rude shocks if yields spike and the prices of their bonds fall as a result.

Considering the average Indian’s ardent love for all financial instruments that come with a sovereign guarantee, we can expect significant traction in this space. Interesting times lie ahead for the country’s G-Sec market.