The Reserve Bank of India’s (RBI) proposal to allow stock exchanges to work as an aggregator for retail investors to bid in primary auctions of bonds could potentially give retail investors an effective tool to diversify their holdings and take away some funds from banks.
The central bank, in its policy document, said specified stock exchanges, in addition to scheduled banks and primary dealers, will be permitted to act as aggregators and facilitators for retail investor bids in bond and treasury bills auctions.
The details are awaited but bond dealers say this may enable retail investors to invest in risk-free bonds at lot size of as low as Rs 5,000 in a dematerialised format. There are ways in which retail investors buy bonds, notably through some banks, but the process is cumbersome and involves much paperwork.
Giving access to treasury bills would be detrimental to banks’ savings deposits, said bond market experts. A customer can buy a 30-day treasury bill and earn 6 per cent and above, instead of keeping money in public sector savings account and earn 3.5 per cent, they added. If the practice picks up, the banks will have to raise their savings deposit rates and this will perk up their cost of funds, which will translate into pricier loan rates.
The measures are expected to be announced for the secondary market as well, as the Union Budget for 2016-17 had asked the central bank to devise such a measure. Secondary market trading happens through an anonymous platform of the central bank. On that platform, only institutions and brokers who have access to Constituents’ Subsidiary General Ledger (CSGL), which is again linked to real-time gross settlement (RTGS) payment system. RTGS accepts payments above Rs 1 lakh which prevents customers to take position in bonds.
However, with exchanges working as the aggregators and bidding a bunched up amount and subsequently allocating the desired amount to retail investors, the impediment of large lot size goes for a retail investor. And this should encourage investors in the fixed income market segment, say bond dealers.
“We are slowly getting into the capital markets. The RBI measure is AA form of disintermediation that would end up attracting high networth individuals at first and other retail investors later on,” said a senior bond dealer with a foreign bank.
But the retail participation would unlikely change the dynamics of bond trading or yields as retail investors can take up to five per cent of the share in any auction.