RBI announced allowing the retail investors to buy-sell government securities directly. In this thread lets explore the What, Why & How of ‘Retail Direct’

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(Q1) Wasn’t the retail already allowed to invest in G-Secs?

Retail could take exposure to G-secs through Mutual Funds and also use brokers & invest in G-secs (since 2018) exactly the way they buy-sell equities (2/n)

(Q2) How of what is announced is different?

(a) Using the current model of the brokers, only buying-selling in the secondary market is allowed. Retail Direct will allow retail to participate in Secondary as well as the Primary market of G-sec (3/n)

(b) This also allows retail to buy-sell directly with RBI without any broker in the middle (no commission), like the direct option of mutual funds (4/n)

(Q3) How & what problem does it solve?

a) Retail Investor–Investor who r risk averse, will get alternative 2 bank FD’s & make better returns, greater safety & more liquidity. Bank FDs are only covered by insurance upto 5L & redemption before maturity invites penalty (5/n)

They can choose T-Bills > Savings account, 5 years SDL > 5 years bank FD etc. Will talk more about this later

(b) Government – Government needs to borrow 12L cr., and that’s how the government will benefit, let me explain (6/n)

India’s fiscal deficit currently is 9.5%. Fiscal deficit is governments Income – Expense. Assume the government having an income of 100 through taxes and expenses of 109.5 (salaries); the -9.5 difference is called the fiscal deficit (7/n)

Where will the government get the 9.5 from? So the government borrows money. in fiscal deficit the governments borrowing. Thanks to Corona & the budget in which more spending 2 boost the economy was announced, the government has a higher fiscal deficit & now needs to borrow

So far only institutional players are allowed to subscribe to the primary issuances of the Gsec borrowing like the Banks, MF’s, Insurance companies etc., now with retail also allowed to participate, it can be easier for the government to borrow. (9/n)

(Q4) How does the government borrow? What’s the G-Sec Market?

(a) Treasury Bills – T-bill’s are short-term borrowings of the government. Borrowing here happens for 91, 182 or 364 days. Look at it as a working capital loan (10/n)

(b) G-Sec – Long-term borrowing by the central government, generally 10 years

(c) SDL – State Development Loans are long-term borrowings by the state government (11/n)

Assume it 2b like ur FD. When government borrows for 91 days, it gives u an FD called T-bill’s & similarly when it borrows for 10 years, it gives u G-sec & when a state borrows, it gives u an SDL. The only difference is these instruments r traded in the market unlike FD’s(12/n)

These papers have no credit/default risk. They are government securities and hence we don’t expect them to default. But they have a huge interest rate risk which I have already written about, read it here -

https://twitter.com/KirtanShahCFP/status/1357143351808688129?s=20 (13/n)

How can you start?

Details are awaited around the KYC requirement, account opening & various other things (14/n)

Suggestion – Use this market only if u want 2 buy & hold the paper till maturity as a retail investor bcoz it will have interest rate risk, which may nt b easy 4 the retail to sail through. Also taxation of an MF is better as these securities have taxation similar to FD (15/n)

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