‘Gilt’ option for citizens

The Reserve Bank of India, during its latest monetary policy review, proposed to allow retail investors to park their money in government securities (GSecs) — also called “gilt bonds” — by opening gilt securities accounts or “retail direct”. This is one of a series of steps that the Reserve Bank has been taking since January 2002 to increase the participation of a larger number of people in the purchase of government securities.

G-Secs are tradeable investment instruments issued by the Central or state governments and are the most risk-free sovereign-backed bonds available in the country. These securities are available in both short-term and long-term tenures — ranging from three months to 30 years — with an annual yield starting from 3.37 per cent. Though commercial banks and asset management companies dominate the G-Secs market now, the RBI’s decision would provide a new risk-free investment option for retail investors.

This decision could also provide elbow room for the Central government to reduce its presence in the banking sector. A couple of years back, former RBI governor Yaga Venugopal Reddy had said that an “average citizen of India is most comfortable banking with PSU banks”. Sixty-five per cent of total deposits in the banking sector are with the public sector banks for the mere reason that they are owned by the government. If most risk-averse depositors could be persuaded to shift to the G-Secs, the government could go ahead with the denationalisation of banks at a faster pace.

However, there still remain a few challenges. Since G-Secs offer lower yields than fixed deposits, many people might not find it an attractive investment option. Banks’ fixed deposits and small saving schemes have become a safety net for vulnerable sections of society and unless the government creates a decent social security net, they cannot be wished away by any government without facing the consequences in election season.