Stiff competition from comparable investment options and a continuing perception of the government bond product being shrouded in mystery are key factors as to why they have failed to draw in mass participation into sovereign debt the way the near-ubiquitous systematic investment plan has managed to for equities.
Cumulative data as on December 11, 2023 showed that the total number of accounts opened on the Reserve Bank of India’s Retail Direct government bond investment platform was 1,06,421. Total primary market subscriptions were at ₹3,337.51 crore. The statistics date back to the inception of the platform on November 12, 2021.
To put the numbers in context, as on December 18, the total outstanding amount of central government bonds was at ₹100.26 lakh crore. Meanwhile, latest data released by the Association of Mutual Funds in India showed that SIP accounts were at 74.4 million in November, with the amount collected only during that month at ₹17,073 crore. The Retail Direct scheme is a one-stop platform to spur investment in government securities by retail players.
THE HURDLES
What has perhaps emerged as the biggest roadblock for retail participation in government bonds is the sharp rise in bank fixed deposit rates since last year amid interest rate hikes and liquidity withdrawal by the RBI.
“When retail investors look at government securities, they tend to compare returns with the fixed-deposit returns.
Various banks are offering very attractive rates, ranging from 7.25% all the way to 7.75% or even 7.85%. When compounded quarterly, that could push returns above 8%,” said Dhawal Dalal, senior EVP, Edelweiss AMC. “Clients are always attracted to equities because of superior returns. Whereas in the last three years, bond markets haven’t done very well. In 2021, 2022 and 2023, if you look at the three-year return, it’s below 5%,” he said.
At present, State Bank of India offers a peak annualised yield of 7.19% on two-year to less-than-three-year term deposits below 2 crore for the general public. For senior citizens, the country’s largest bank is offering an annualised yield of 7.71% for two-year to less-than-three-year and five-year to less-than-10-year deposits.
The most traded three-year government bond in the secondary market was last at 7.05% yield while the 10-year government bond was at 7.17%. Even when viewed from the prism of credit risk, government bonds — which are risk-free assets—lose out to fixed deposits offered by public sector banks as these lenders are considered to be quasi-sovereign.
One of the biggest sources of competition for govt bonds comes from another govt product itself — small savings schemes. Many of the small savings products offer higher returns than government bonds while also offering tax exemptions.
“On the tax front, in 80 C or an equivalent of that, perhaps a 50,000 limit for whatever income comes could be considered. Essentially it can be that for whatever you invest up to a limit, you can reduce your tax burden by 10,000 or so. Alternatively, certain interest income could be exempt from tax,” said PNB Gilts MD & CEO Vikas Goel.
Market players also flagged the need for more awareness about government bonds, especially given the strict competition from well-publicised equity market schemes.
“The understanding of the bond market is very limited. That is one of the main reasons why people are not attracted to Retail Direct. People still think that once they invest, they cannot sell. More awareness and education is required,” said Debendra Kumar Dash, senior vice president of treasury at AU Bank.