Through G-Secs issue government attempts to bring in household savings and contribute to government funds and boost the Government Security(G-Sec) market. Since tax-free bonds were well received, the government has considered issuing bonds to retail investors for roads and railways which form a part of the 12-crore program.
In the case of debts, an amount borrowed from an investor is promised to be repaid at the maturity of a certain period along with additional annual rates of return. If the investor redeems it before the time they are penalized, however, the Principal is repaid. This is also applicable to corporate bonds, but if they are rated high with credit scores like “AA” and the investor understands the accompanying assurance, a purchase is instantly made. If this investor who purchased it wants to sell it, it will be harder as it might not be listed and the price may differ from face value. Price varies depending on the environment, making corporate bonds inferior to bank deposits in risk and uncertainty terms if not held till maturity.
In the G-Sec market, a 2030 bond with a yield of 5.77%, face-value Rs100, the price is Rs 97.76 with an implicit yield of 6.08%. Holding on to these till 2030 will give an annual coupon rate on investment. The difficulty is when it is to be sold in the market having about 90 listed government securities with just a few of them performing well which are benchmark securities for 5,10 and 15 years. 10-year G-Secs account for two-thirds of the trades and 20% by those in the benchmark 5 to 15 years. But these benchmark securities become illiquid in the t+1 year. Therefore 5.77% benchmark for 10 years loses its relevance once new benchmark security is announced and trading gets diluted. Since exit from the market is difficult, it is assumed that retail holders will hold the security till maturity.
There are RBI bonds with variable returns of 7.15%, National Savings Certificates giving 6.8% for five years, and senior citizens schemes of 7.4% for five years. This makes the G-secs pale in comparison although they offer higher returns than FDs. Even then FD rates increase over years but G-sec yields are fixed. The yields on deposits and other savings are driven down by repo rates. Then again, to reduce the government’s borrowing rates, the yields of G-Secs are also down. The government securities go 35bps above the small savings rate. Therefore, neither are G-sec returns attractive nor can they be traded due to illiquidity.
The aforementioned reasons drive the retail investors away from Government Securities and they prefer mutual funds where they have an efficient fund manager making portfolio decisions according to changing market scenario. Therefore, the decision to open the market to retail investors may be met with indifference. An interest rate of 7% on face value Rs100 with exit options through special bonds for specific purposes may prove to be more attractive as opposed to the conventional G-Sec platform.