Retail Direct Scheme of RBI

News: The RBI has announced a scheme under which retail investors will be allowed to open retail direct gilt accounts (RDG) directly with the central bank.

About:

  • Under the scheme, retail investors (individuals) will have the facility to open and maintain the ‘Retail Direct Gilt Account’ (RDG Account) with the RBI.
  • Retail Investor is a non-professional investor who buys and sells securities or funds that contain a basket of securities such as mutual funds and Exchange Traded Funds (ETFs).
  • A Gilt Account can be compared with a bank account, except that the account is debited or credited with treasury bills or government securities instead of money.
  • RDG accounts can be opened through an online portal provided for the purpose of the scheme.
  • The online portal will give registered users access to primary issuance of G-secs and access to Negotiated Dealing System-Order Matching system (NDS-OM).
  • The RBI introduced the NDS-OM in August 2005. It is an electronic, screen based, anonymous, order driven trading system for dealing in G-secs. It is a one-stop solution to facilitate investment in G-secs by individual investors. RBI seeks to democratize the ownership of government debt securities beyond banks and managers of pooled resources such as mutual funds.

Government Securities

  • These are debt instruments issued by the government to borrow money.
  • The two key categories are:
    • Treasury bills (T-Bills) – short-term instruments which mature in 91 days, 182 days, or 364 days
    • Dated securities – long-term instruments, which mature anywhere between 5 years and 40 years
  • Like bank fixed deposits, g-secs are not tax-free. They are generally considered the safest form of investment because they are backed by the government. So, the risk of default is almost nil.
  • However, they are not completely risk-free, since they are subject to fluctuations in interest rates.
  • Bank fixed deposits, on the other hand, are guaranteed only to the extent of Rs 5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
  • Small investors can invest indirectly in g-secs by buying mutual funds or through certain policies issued by life insurance firms.
  • To encourage direct investment, the government and RBI have taken several steps in recent years.
  • Retail investors are allowed to place non-competitive bids in auctions of government bonds through their Demat accounts. Stock exchanges act as aggregators and facilitators of retail bids.