Govt mulls gilt trade via demat a/c

Written by Sunny Verma | New Delhi | Updated: Mar 13 2012, 08:19am hrs
The Reserve Bank of India and the finance ministry are planning to give some incentives to retail investors to boost their participation in government securities (G-sec) market. Besides asking banks to start electronic sale of G-sec papers to retail investors, the ministry is considering enabling investors to buy bonds through demat accounts. Demat accounts are currently used to trade in shares and derivatives and for holding units of mutual funds.

A RBI panel is expected to submit a detailed report analysing the G-sec market, and suggesting steps to increase participation of retail investors in this market, an official familiar with the proposal said. Retail investors investment is currently negligible in the G-sec market, wherein the outstanding value of government bonds is about R32 lakh crore.

IDBI Bank recently started an online facility for retail investors to buy bonds. The official said there is still a need to fine-tune the electronic buying process, and make it simpler for the investors to buy bonds.

Currently, the government reserves a quota of up to 5% for the retail investors during auction of bonds. However, this quota is rarely utilised by the investors as the process of bidding for bonds is currently cumbersome.

Banks and other financial institutions such as insurance companies are at present major buyers of bond. Banks have to mandataorily buy government paper to meet their requirement of the Statutory Liquidity Ratio. Various market players and expert panels such as Percy Mistry and Raghuram Rajan panels reports on financial reforms have highlighted the need to widen the investors base for government securities.

Retail investors participation in the G-sec market is indirect, through their purchase of gilt mutual funds. A finance ministry report recently highlighted the rising levels of government borrowings as a matter of concern. Bloated borrowings could permanently push up governments borrowings costs, it said.

Enhancing retail participation is important in this light. The yield on the most traded 10-year benchmark 8.79% bond ended 2 basis points higher at 8.30% on Monday, on expectations that the RBI is unlikely to cut interest rates before April. Total borrowings of the government are now pegged at R5.1 lakh crore for 2011-12, much higher than the R4.17 lakh crore budget estimate.