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The Reserve Bank of India’s (RBI) Retail Direct platform, aimed at increasing retail investor participation in the government bond market, has struggled to gain traction due to complex settlement mechanisms and liquidity issues, according to market participants.

Prime Minister Narendra Modi inaugurated the scheme in November 2021 with the goal of allowing individual investors to directly invest in government securities by maintaining an account with the RBI. However, uptake of the platform has been limited, with only 120,626 accounts opened as of April 8, compared to the approximately 111.56 million demat account holders with Central Depository Services (India) Ltd as of March 31.

Trading volume in the secondary market through RBI Retail Direct has been modest, totaling Rs 656 crore, while primary market subscriptions stood at Rs 4277 crore in early April.

What ails?

A major concern among market participants is that government bonds are issued in the Subsidiary General Ledger (SGL) format rather than the more common Demat format used by investors’ demat accounts with commercial banks. This has led to a cumbersome process for retail investors, as SGL-format bonds cannot be traded directly with demat accounts.

In the secondary market, retail investor trades typically occur under the odd lot segment of the Negotiated Dealing System – Order Matching platform, where orders smaller than the regular lot size of 50 million rupees are traded. However, brokers report that retail investors often receive prices lower than market levels, reducing potential profits and making government securities less attractive.

Additionally, the current taxation regime for returns on government securities has made them less appealing for high net worth individuals compared to other investment options, such as mutual funds. While investing in debt mutual funds offers similar returns, it also simplifies the trading process and incurs a similar tax rate.

Despite efforts to improve accessibility, such as the upcoming launch of a mobile app for the Retail Direct portal announced by RBI Governor Shaktikanta Das, structural issues persist, according to brokerages. These challenges may continue to hinder the widespread adoption of the Retail Direct platform among retail investors.

  • Published On Apr 22, 2024 at 07:53 AM IST

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