RBI Retail Direct Scheme & Benefits

RBI Retail Direct Scheme allows retail investors to buy and sell government securities (G-sec) online both in the primary and secondary markets. According to details provided by RBI, small investors can now invest in G-Secs by opening a gilt securities account with the RBI. The portal for buying and selling of government securities can be accessed at www.rbiretaildirect.org.in The account opened will be called Retail Direct Gilt (RDG) Account.

Who can open the RDG Account?

As per the notification issued by the RBI on July 12, 2021, a retail investor can open the RDG account if they have following

1. Rupee savings bank account maintained in India
2. PAN issued by the Income Tax Department of India
3. Any official valid document such as Aadhaar, Voter ID for KYC purpose
4. A Valid email ID and
5. A Registered mobile number

The RDG account can be opened singly or jointly with another retail investor who meets the eligibility criteria.

How to Register on the online portal?

Investors can register on the online portal by filling up an online form. Then they will use the OTP received on the registered mobile number and on their email ID to authenticate the information. Upon successful registration, ‘Retail Direct Gilt Account’ will be opened and details for accessing the online portal will be conveyed through SMS & e-mail.

RDG Account shall be available for primary market participation as well as secondary market transactions on the NDS-OM (Negotiated Dealing System – Order matching).

Buying & Selling of Government Securities via online portal

Once the account is opened, retail investors can buy government securities in the primary market, where government bonds are issued for the first time or buy/sell the existing government bonds in the secondary market.

Buying Government Securities in Primary Market

Participation and allotment of securities will be as per the non-competitive scheme for participation in the primary auction of government securities and procedural guidelines for sovereign government bond issuance.

Buying & Selling of Government Bonds in Secondary Market

• Registered investors can access the secondary market transaction link on the online portal to buy or sell government securities through NDS-OM.
• For buying of government bonds, payment can be made through either of the following ways
  1. Before start of trading hours or during the day, the investor should transfer funds to the designated account of CCIL (Clearing Corporation of India NDS-OM) using net-banking/UPI from the linked bank account.
  2. Based on actual transfer/success message, a funding limit (Buying Limit) will be given for placing ‘Buy’ orders. At the end of the trading session, any excess funds lying to the credit of the investor will be refunded.
  3. Use the UPI facility to block funds in the linked bank account at the time of placing order which will be debited from the account on the day of settlement. Similar facility through banks will be made available in due course.

Securities purchased will be credited to the RDG Account on the day of settlement.

• For selling of government bonds, securities identified for sale will be blocked at the time of placing order till the settlement of the trade
• Funds from the sale transactions will be credited to the linked bank account on the day of settlement.

Charges for RDG Account

Our Takeaways

1. G-Sec as an investment avenue is an excellent option for all investors since there is no credit risk unlike Corporate FD, Corporate bonds, Perpetual bonds etc.
2. Even the bank fixed deposits have an insurance coverage for only up to ₹5 lakh. Hence, it looks unsafe for FD beyond ₹5 lakh. However, it is presumed that FDs with PSU Banks, FDs with systemically important Banks and other commercial banks are assumed safe since the RBI & Government will try to save the depositors from losing money always. However, when it comes to direct investment in G-Sec, there are no such presumptions required.
3. If an investor has set a clear objective & understanding towards an investment in G-Sec (e.g. this particular investment is for retirement income), then It is the best option among the available debt investment avenues. It should be well noted that the regular Income from G-Sec is guaranteed.
4. With regard to medium term horizon (3-5 years), if an investor prefers G-Sec, Gilt funds e.g. debt MF which invests only in G-Secs, it will offer better returns due to tax advantages. In case of an investment into debt MF with 5-year horizon, investor has to pay tax when the redemption happens at the end of 5 years and it is LTCG of 20% with indexation benefit. However, in direct investment into G-Sec through RBI, Investor has to pay “tax on interest pay-out” received every year and tax rate will be as per tax slab. When an investor is in higher tax bracket of 30% tax slab, investment into Gilt funds works better due to this tax advantage.
5. With regard to short term investment with 3 months to 3-year horizon, there is no interest rate arbitrage between FD and G-Sec. Due to various operational difficulties & maintaining funds/investments in various platforms, investment in FD will make sense if investment horizon is less than 3 years.
6. Overall, Direct Investment in G-Sec is suitable for longer term (for e.g. to get retirement income) however, other debt instruments (e.g. debt MF as well as FD) look better when the investment horizon is short or medium term.

However, investors should understand few of the risks or concerns associated with G-Sec as well.

1. Interest Rate Risk – Long dated G-Sec i.e. 10year G-Sec is always sensitive to interest rate movement & its mark to market value keep fluctuating due to interest rate movement and related news flows. Hence, market value of investment will get changed every day and in case of an unplanned redemption of G-Sec, there is probability that investor may lose bit portion of capital. Hence, it should be well noted that investment in G-Sec is to buy and hold till maturity.
2. Liquidity Risk – There is an ample liquidity for G-Sec. However, it should be kept in mind and the liquidation of particular dated G-Sec available with investor is subject to availability of buyer at that point in time.
3. Operational Difficulty – Currently, we all are managing our money and investments through various accounts, platforms etc. Investment through RBI portal will add up another one platform and it may be considered as an operational burden for few of an investor.