In order to augment the participation of retail investors in the Government debt market, the Reserve Bank of India (RBI) has initiated talks with bond market participants. Moreover, in an attempt to do so the central bank may soon do the following:

 

• Mandate the Clearing Corporation of India Ltd (CCIL) to develop an online trading platform for Government bonds on which movement in yields can be measured in real time and trades can be executed;
• May reduce the minimum lot size, from the present Rs 10,000; and
• May increase the reservation for primary auctions of Government bonds (at present 5% is reserved for retail investors but there are hardly any takers)

 

The secondary market at present which has turnover of as much as Rs 15,000 crore is mainly dominated by banks and institutions (with “T + 2” settlement cycle followed for trade settlement). And the retail bond investors are allowed to trade through a Constituents’ Subsidiary General Ledger (CSGL) account maintained by banks or brokers. This in turn takes time and the absence of live market feed precludes investors from taking advantage of interest rate volatility. Moreover, interestingly according to most bond dealers retail investors don’t even know how to invest in the debt market and their best bet are debt funds offered by mutual funds.

 

We think while the measure taken by the RBI is good in the long-term interest for the Government debt market. However, we are of the opinion that the central bank should also engage in investor education in doing so, which would provide retail investors with the requisite knowledge to trade in the debt segment. At present one of the main reason why most retail investors aren’t interested in the debt market trading, is due to low returns generated by debt instruments.

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