Monetary policy: Retail interest in G-secs may be limited, say experts

HNI participation may be gradual; mutual funds see little impact on fund flows

The Reserve Bank of India’s (RBI’s) move to allow direct retail investor participation in government bonds is likely to attract more interest from high net-worth individuals.

Also, enhancing retail interest is going to be long-drawn-out affair. Nor is it expected to hit the flow of money into bank deposits and mutual funds, ruling out a substitution effect, said bankers.

Small savings instruments, though illiquid, yield better returns than government securities and hence only high net-worth individuals may be interested in them, said Karthik Srinivasan, group head, financial sector ratings, ICRA.

Soumyajit Niyogi, associate director, India Ratings & Research, said participation could take longer, given the strong presence of the banking system and mutual funds.

Participation is expected to be segment-specific and will be dependent on the interest rate regime.

Dinesh Khara, chairman, State Bank of India, said allowing retail participation in the G-Sec market was a step towards finalising a vast pool of domestic savings and could be a game-changer.

Public sector bankers said the move would help wealth management teams to attract clients with a huge surplus to participate in government borrowing programmes.

Unveiling structural reforms of retail participation in the G-sec market, along with the extension of the held-to-maturity limit relaxation, will help in smoothly completing government borrowing programmes, said S S Mallikarjuna Rao, managing director and chief executive, Punjab National Bank.

Mutual funds do not see this move as restricting the flow of money into their schemes.

Swarup Mohanty, CEO, Mirae Asset MF, said funds would not be affected much.

Gilt funds have been cyclical in nature with investors coming in during rate-cut cycles. They have never been that large in assets under management (AUM) or attractive from the retail investors’ perspective.

AUMs of gilt funds as of December 31, 2020, stood at Rs 20,200 crore.  

R Sivakumar, head (equities), Axis MF, said it was not a segment that has seen major traction.

Encouraging retail participation in any asset class is positive. There would be no net major impact on mutual funds as a result of this, primarily because it is not a core category.

Dwijendra Srivastava, CIO (debt), Sundaram M, said even in countries where financial literacy was high, the product (direct interest in G-Secs) had not taken off. This is just an enabling provision and it will take a while before retail investors started investing in gilts directly. Also, it remains to be seen if retail investors can digest the volatility in the product, which could be high sometimes.