Last week, India launched its Retail Direct scheme, which lets domestic investors buy government securities directly through a special window opened by our central bank, but a weak response attracted more and more investors. may inspire the search for ways to do so. It is usually the bond market experts who trade these instruments. They are free from default risk. Unless held to maturity, however, such bonds carry interest-rate risk, as their prices move against market rates. Securities sold in the secondary market may fetch a price lower than what an investor would have paid. They also carry liquidity risk, as the majority of market trades are concentrated in securities of specific tenures, and other papers do not easily find buyers on the other end. They also face competition from gilt mutual funds, which offer a tax-efficient route to sovereign paper ownership.
Perhaps a tax exemption for direct bond purchases would increase the scheme’s appeal and widen the pool of investors in government debt, a prospect that could be of financial help over time. But we also need a public education campaign. It is in the interest of the Finance Ministry to popularize this investment route and introduce it to common investors.
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