India becomes the first Asian country to allow small investors to directly lend to the government
RBIhas opened a new tap for the government to borrow from: millions of India’s small investors.
- There are very few countries namely the United Kingdom, Brazil and Hungary with similar options for small investors, the RBI spokesperson told Business Insider.
- With the latest announcement from RBI, the small investors will have a new platform, just like the trading platforms for stocks, which will be directly under the central bank.
AdvertisementIn a landmark move, the Reserve Bank of India today said that retail investors in India will be given online access to invest in
However, with the latest announcement from RBI, small investors who do not like the risk of stock markets will have a new platform — dubbed
“We have this aggregator model through stock exchanges but now we’re giving retail investors direct access,” said
India becomes the first Asian country to give small investors direct access to government securities
With this new move, India has become the first Asian country to allow small investors a direct window to lend to the government. There are very few countries namely the United Kingdom, Brazil and Hungary with similar options for small investors, the RBI spokesperson told Business Insider.
“With the size of the government borrowing, it is absolutely necessary that the investor base is broadened,” said Das.
The RBI has opened a new tap — and arguably an endless source— for the government to borrow from. Until now, the government was reliant on banks, insurance companies, and foreign investors to borrow money from.
“For retail investors, this is relatively trouble free way otherwise they would have to go through mutual funds to invest in government securities. It’s a convenient way for them to diversify their portfolio,” said Saugata Bhattacharya, Senior Vice President at Axis Bank in a conversation with Business Insider
However, there is a catch. “The investors also have access to small savings instruments — unless the rates on small saving instruments are rationalised and brought in line with the government securities the interest to invest in government securities would be relatively moderate,” Bhattacharya added.
How will the new system work?
The RBI is yet to release further details of the new system that will allow retail investors online access to the government securities market and allow them to open gilt securities accounts with the apex bank.
A gilt account is something like a bank account. Instead of money, the account is debited and credited with treasury bills or government securities.
AdvertisementSimply put, it’s an account for holding government securities — a tradable instrument issued by the central or state governments when they need to borrow money from the RBI. It acknowledges the government’s debt obligation to whoever buys the securities.
Government securities are also often referred to as ‘risk-free gilt-edged instruments’ because the risk of default is negligible. In fact, government securities are considered to be safer than fixed deposits (FDs) in banks since they come with a sovereign guarantee.
Government securities offer a fixed rate of interest with long maturity periods ranging from a minimum of one to year to a maximum of ten years.
The move should be of particular interest to pensioners who are always on the lookout for safe investment options that can give them assured returns in the long run. SEE ALSO:
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