India struggles to woo retail investors to govt bonds

By Neha Dasgupta and Swati Bhat

MUMBAI (Reuters) - The Reserve Bank of India's move this month to allow retail investors to buy government bonds has so far failed to lure savers, throwing into question efforts to deepen the country's debt markets and help cushion them from global volatility.

Without tax breaks or other incentives, India's small investors are unlikely to flock to government securities even with easier access, not least because they can get better returns from other savings products, traders say.

That is in sharp contrast to foreigners' appetite for Indian government debt -- their investment limits are nearly exhausted.

"By itself, whatever medium you create, interest is likely to be muted from individuals. In most deep markets, money is routed through a pooled fund mechanism, through institutions," said Ashish Parthasarthy, treasurer at HDFC Bank.

Globally, sovereign debt is usually held by a clutch of institutions with minimal retail participation, and in India too, the current share of retail investors is much less than 1 percent out of the total $635.75 billion outstanding.

But the RBI paved the way for that to change earlier this month, betting that more retail investors will stabilise demand. It has in the past criticised primary dealers for failing to do enough to put government bonds within the reach of average investors.

This month, it announced a slew of measures to allow internet-based access for retail investors, for example.

But traders are sceptical, and volumes little changed.

"The RBI belief is misplaced that a large pocket of liquidity is waiting to come in to government bonds," said a senior official with a brokerage.

Like other countries, individuals in India invest in the sovereign debt market usually through institutions like Life Insurance Corporation, the dominant life insurer.

Retail or mid-segment investors typically turn to savings instruments such as fixed deposits, which offer interest rates around 8.75 percent - at least 100 basis points more than T-bills and 10-year benchmark bonds.

Yet a policy official involved with the developments said the RBI bid to provide direct web-based access to existing bond investors was key, as it brought down the cost of investment. Volumes could well follow, eventually.

"If we start focusing on it in the right spirit right now, it will take us four to five years to see any meaningful change," said Killol Pandya, senior fund manager, fixed income at LIC Nomura Mutual Fund Asset Management.

(Editing by Clara Ferreira Marques & Kim Coghill)