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Gilts Go Retail

Retail trading of government securities has begun. Here's the lowdown.

By Ashish Gupta

G-secs are in now

At long last, retail investors in India will be able to buy Indian government securities (gilts) as easily as they buy shares. Beginning January 16, gilts were listed on the National Stock Exchange (NSE), heralding the commencement of screen-based trading in government debt.

The development marks a watershed in the Indian debt market. So far, trading in gilts was almost exclusively the preserve of banks and insurance companies, which have made pots of money on their bond portfolios of late, as gilt prices have risen and risen, driving yields down to an unprecedented low of under 6 per cent. Ordinary investors will now be able to trade in G-secs by opening demat accounts with depository participants (DPs) of National Securities Depository (NSDL) and BSE's Central Depository Services.

"The new system makes the market more broad-based, and at the same time offers small investors another safe avenue for investment,'' maintains Finance Secretary S. Narayan. "Though the big players will continue to dominate the market, as seen in developed markets like the US, the entry of retail investors will, over time, add much-needed depth to the market,'' he adds.

Again, in terms of the balance between the risk and returns at the retail level, gilts will compete with bank fixed deposits. From the individual's perspective, fixed deposits are almost as safe, especially in the case of public sector banks, and have the added advantage of assured and immediate liquidity.

True, a well-functioning gilts market may prove equally liquid, and gilts have the added attraction of the tax break on the interest earned, something that bank deposits cannot boast of. But whether the market becomes liquid enough is still a question. And until the system stabilises and market depth starts becoming a visible reality, investors may remain wary. Then, there are other factors that could scare retail investors.

Volatility, for example. Gilts are seen as 'safe' in the default-risk sense, but this does not mean that investors cannot lose money on speculation.

For sophisticated gilt traders, it's a game of taking bets on the direction of interest rates. Understanding the dynamics of this is a complex task, since it involves an understanding of macroeconomic fundamentals. So far, secondary market gilt prices have simply risen, and letting retail investors in might mean added demand -- so still higher prices. But just how high can gilt prices go? They're already higher than what many thought possible -- and some fear that a bubble, driven by peculiar circumstances, may be developing.

Of course, holding gilts for the long-term (say, till maturity) means that it is just another form of debt -- where you're sure the debtor will pay back. For non-speculative purposes, gilts could be a worthy part of any individual investment portfolio.

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