A newly created investment window is now open for non-resident Indians (NRIs) as the Reserve Bank of India (RBI) has launched the Retail Direct Gilt Account Scheme to allow retail investors to buy and sell government bonds.
The scheme allows retail investors to open an account straight with the financial regulator RBI rather than with a bank. NRIs are allowed to buy government bonds through their NRO (non-resident ordinary) bank accounts.
NRIs are eligible to invest in government securities under Foreign Exchange Management Act 1999 and are now allowed to open account with the RBI and invest in government securities via the scheme.
The advantage of the scheme is that NRIs can open their accounts and buy bonds overseas.
The scheme is free and does not involve any intermediaries, which helps reduce overall transaction charges for individual investors.
AS Elavarasan, chairman of ASPA Management Consultancy, Dubai, said: “These bonds are ideal for NRIs who are looking for a steady income from debt instruments to meet the cash flow of parents or to maintain their property in India.”
Under the current rules, NRIs are not allowed to invest in small savings schemes such as public provident fund, Kisan Vikas Patra and National Savings Certificate offered by the Department of Post. NRIs can invest in bank deposits and corporate deposits, but these are available for periods of five-to-10 years.
Long-term products give the investor an option to lock in investments at that rate, giving predictability of cash flows. Short-term products carry reinvestment risk, making it difficult to plan cash flows, as interest rates could change on maturity.
The returns are attractive as Government of India bonds offer 6.5-7% yield as against 1-2% interest in developed markets.
For example, a bond maturing in 2050 is currently available at a yield of 6.91%, while those maturing in 2058-2061 can give a yield of 7-7.1%.
The bonds pay interest every six months and there is no cumulative option.
Elavarasan added: “The NRI attraction is that government securities give sovereign guarantee and are available with long tenures. NRIs can buy these long tenure government securities as part of their retirement planning to get regular annuity income in terms of interest to meet their post-retirement expenses.”
However, advisers have warned investors about rupee depreciation risk as the Indian currency has a history of depreciation.
Biju Radhakrishnan, director of FRG Consultants and Chartered Accountants, Dubai, added: “Investors should buy these securities with an objective of holding till maturity as there is risk of mark-to-market losses if interest rates rise and liquidity remains low.”
The scheme will attract NRI investors because it offers nil credit risk, easy application process through a digital platform, predictable cash flows and lower transaction charges.
Radhakrishnan added: “The bonds give a reasonably higher returns and therefore it is a desirable secure debt option for NRIs.”
The bonds have a defined maturity date, therefore if they are held till the bond matures, the returns will not be dependent on price movements in the market. This allows the investor to protect themselves from market volatility by holding till maturity.