[feb] Retail investors to get direct access to Govt-sec market Flashcards
Explanation(VIVEK singh)
1) RBI manages the issuance of Govt. securities through “e-Kuber” platform. Earlier retail investors (like we people) were not allowed to purchase the govt securities (bonds/ debt paper) directly at the time of issuance. But now its allowed. Let me elaborate it.
2) Suppose Govt want to raise Rs. 50,000 crore by issuing bonds (debt). Now a lot of people/investors may be interested to purchase these bonds. So, investors want high interest rate on bonds BUT govt want to issue bonds at lower interest rate (to reduce its cost of interest). So, auction happens. So, investors (those who want to purchase the govt bonds) place BID to purchase the bonds. If govt wants to raise less money (i.e. it wants to issue less bonds) and more people/investors are interested in purchasing then the interest rate will go LOW. But if Govt. wants to raise more money and less people are interested in purchase of those bonds then interest rate will go UP.
3) Now because of covid-19, Govt. borrowing is going to increase, so if more people/investors are allowed to purchase (place bid) for the bonds then the interest will go down and govt. will be able to reduce its interest burden and that is why it has allowed retail investors to participate directly in the Govt. bond market. This will also broaden the Govt. securities market. It is a structural reform.
4) When Govt. (actually RBI does on behalf of Govt.) is issuing the bonds for the first time then also we people can place bid and purchase. This transaction is called Primary Market (between RBI/Govt. and investors). And once I purchased the bond then after some time I sell it to some other investor is called Secondary market (between investor to investor). So, retail investors are allowed in both markets now. And if I purchased a bond whose maturity is of 5 years then I can sell before that also to some other investor because Held to Maturity restriction has been removed.
5) RBI governor has said that it will not impact bank deposits. But I feel it may impact and he may have said no for some other reasons also. He is also trying to say that if economy will grow and people income will grow then there will be more savings which can go in banks or Govt bonds or mutual funds. So, if the volume will grow then it may not impact bank deposits.
