Buying Government Bonds Directly From RBI: The RBI Retail Gilt Platform

How can you buy government bonds? Why should you buy them? Do you bond with the government? So many questions, so little time. So we’ll try and answer all but the last question in the context of The RBI Retail Direct Platform.

This is a new platform by RBI that allows retail investors to buy RBI bonds directly. It’s a simple process to work with so let’s start at the beginning.

First, Should You Buy Government Bonds?

Government bonds are the safest bonds on the planet in terms of rupee investments since the government effectively guarantees them. They obviously should carry the lowest interest rate compared to all banks, you would think. But it’s not always so. The government bond yield can be higher. Or, you might ask, why can’t I buy gilt funds instead, which own government bonds?

So here are the reasons you might want to buy government bonds:

• You want a long term annuity:  If you buy something now and want income for the next, say, 40 years, there’s no bank willing to give you something of that sort. Interest rates could fall dramatically in 5 or 10 years, which can crimp your income later. Government bonds go as long as 40 years from now and give decent yields (December 3, 2021: 6.92% return)
• You really want safety: Even gilt funds are not as safe as buying government bonds to hold to maturity. (Gilt funds can buy and sell their underlying bonds and generate some risk in terms of interest rate movements, and your capital can be at the mercy of markets. Holding a bond to maturity reduces that risk as you get closer and closer to the maturity date)
• You want a higher return: There are times when the return on government bonds is higher than an equivalent fixed deposit. For instance, on Dec 3, 2021, at about 6.88% for ten years, the Karnataka state government bonds seem to be at a higher return than most banks for that period.

It makes a lot of sense to buy a government bond for a long-term cash flow requirement with the highest safety level. A retired individual or family, or a person not very keen on taking risks, could use this to replace fixed deposits.

Remember though that there are disadvantages of government bonds:

• Interest is taxed: You’ll pay tax on the interest you receive as part of income. Gilt funds are better here because they pay no tax on receiving interest, so the amount gets compounded. Buying government bonds is tax-inefficient if you don’t really need the cash flow. (However, it’s the same as a fixed deposit, so it’s a useful alternative to an FD) Note: There is no TDS on government bond interest.
• Liquidity can hurt: There may not be enough liquidity tomorrow to sell if you buy a bond today. Of course, it’s always possible to get a loan, but it’s not evident how to pledge your securities with the RBI platform. That may still be enabled later.
• Prices will fluctuate: When interest rates go up, bonds lose money. In an FD, all you lose is a penalty on the interest you get, but in the bond market, you can see your principal come down as well.

What are the alternatives, otherwise?

RBI Floating rate bonds: has a set of long term locked in bonds, called Floating rate bonds. Interest rates will change with the post office National Savings Certificate (NSC) interest rates + 0.35%. (In Dec 2021, NSC rates are 6.8%, so the RBI Floating Rate bonds are 7.15%. Every six months, they will revise the interest rate accordingly. You can’t sell these bonds or pledge them for a loan. For seven years, you can’t exit (senior citizens get lesser lock-in periods). If you don’t mind the lock-in, this is a good alternative for a seven-year period.

Gilt and Target Date Mutual Funds: Gilt funds buy government bonds. You can’t control what maturity and yield you will get, but if you like the fund structure, they are a better structure for taxation. If you hold a gilt fund for three years, any subsequent exits get taxed at a lower rate for capital gains (20% including indexation for inflation). Additionally, certain Target Date funds exist (like Edelweiss PSU “Bharat Bond” funds, Nippon 2027 fund etc.), which allow you a similar level of safety with a target date, but without paying tax on the interest in the interim.

Fixed deposits:: To avoid price risk due to changes in interest rates, a fixed deposit is better than a government bond because it will give you no drop in the principal (only a lower interest rate if you withdraw early).

Other retirement products: Products like the PMVVY (7.4% from LIC, locked in for ten years, max 15L) and Senior Citizens Savings Scheme (7.4%, from a PSU bank, locked in for five years, max 15L) will make more sense for someone who has crossed 60 years of age. Beyond that, the RBI Floating Rate bonds are useful, and then, government bonds.

Having said that, it’s useful to go through the process.

How to register

You have to go through this process:

• Go to https://rbiretaildirect.in/#/rdg-account-registration
• You can open a single or joint account. When you put in your email id or phone, you’ll get an OTP at each to confirm.
• You will need to upload a cancelled cheque or allow online verification of your account details
• And then, wait. You will get an email in a day or so, allowing you to access the platform with a password.

The Retail Direct Platform has two parts.

1. Primary: Here, you bid for new issues (typically every Friday or so) or any Sovereign Gold Bonds or such. Think of this as a bond IPO.
2. Secondary: You can trade bonds by buying from or selling to someone else. This is like buying shares using your broker on the NSE or BSE.

How to use the primary RBI bond platform

Here’s what the screen looks like:

You can click on a bond, but it won’t tell you that much, really. There’s a lot more work required on the portal. The “NI” Govt. Stock 2061 was like this:

• NI means new issue (that means its exact coupon was not known, it will be known only when the auction ends on Friday. It turned out to be 6.95% later, btw.
• To find out what each bond means, you have to go to the RBI notification for the week. For instance, when the screenshot was taken, RBI Notification is here, and the government notification is here.
• How do you analyze a bond? It’s impossible to give you enough detail here (look at our articles on bonds). Small example below:

A sample bond check: Let’s look at the basic steps of, say, the 6.1% Govt. Stock 2031. The government notification says it will pay interest on Jan 12 and July 12 of each year. The ‘coupon’ is what you get for every Rs. 10,000 face value. (Government bonds have a face value of Rs. 10,000)

So at 6.1%, you will get  305 on Jan 12, 2022, and then another Rs. 305 on July 12, 2022, etc. It matures on July 12, 2031 (not given here but

The “yield” is different because you will probably pay Rs. 9820 per bond. So for that price, your yield can be different. There are calculators to help find this, but I will put that at the bottom of the post.

Bidding for a bond in the auction:

You can buy bonds by entering a bid and paying for the bond in advance.

Remember:

• Bids are multiples of Rs. 10,000 only (min is Rs. 10,000)
• The “indicative settlement amount” is usually higher because it will include any accrued interest on the bond
• What is accrued interest? If a bond pays interest in July and January and you bid in December, you will get a six-monthly interest in January, but you would have held the bond only for one month. To avoid confusion, you pay an extra amount equal to the interest from the last interest payment date to the auction date.

After you enter the bond, you have to transfer the money. This can be done through their fund interface, which allows you to transfer money using net banking or UPI. (Linked to the bank account you registered with them).

They’ll typically charge you a higher amount as a buffer, and the remaining money is returned the next day or so to your bank account. If the bid doesn’t go through, the full money is returned to your bank account.

Then the bond comes in and stays in your account with the RBI. Note that:

• The bonds you hold will not reflect in any Demat account you own. Nor in the NDSL/CDSL CAS. RBI has a different ledger, called SGL, of which only RBI is the boss.
• Interest and principal will come directly to your bank account
• There is no fee for any of this, including registration or trading. However, you might see a slightly higher price as a commission for the bond process for a primary bond bid.

That’s pretty much all you need here.

The Secondary Bond Trading Platform

You don’t automatically get access to the secondary platform. See the green NDS-OM icon on the primary platform? You have to click that, and a “request” will be automatically sent to the RBI. They will then come back to you and tell you that you’re okay. It took me three days. If you’re feeling nostalgic about the old days when the time was slow, and you send your application in triplicate and wait for the postman to deliver your letters, RBI will help you relive it. We suggest the song “Fast Car” by Tracy Chapman while away your time.

We will now tell you how to use the secondary platform of the RBI retail direct platform.

You have to log in to https://retail.ndsom.com/ after you get the permission above. You can see a list of bonds here – I’ve created a list below. Each one is a different bond for which you can bid.

What are these bonds?

• 6.10 GS 2031 = a central government bond maturing 2031, which will pay a 6.1% coupon. This is the current 10-year bond (but next year, there will be a new 10-year bond)
• Similarly, 5.63 GS 2026 is a five year (12 April 2026 maturity) bond that gives 5.63% as a coupon.
• Coupons for government securities are once every six months (half the quoted coupon)
• The “OD” stands for the odd-lot market. Full markets (“standard”) have a ₹ five crore lot size.
• Bid Yield, BidPrice and Bid Amount correspond to where you can sell (best bids) and a similar thing on the offer (where you can buy)

Adding new things to watch/buy: Choose this from the add button. Here’s a list I got when I filtered for maturity in 2026:

There’s everything in there, but not everything is traded. To find out what’s trading, you have to check out the following link: https://www.ccilindia.com/OMMWOL.aspx where you can see any odd-lot bids for the day.

When you want to buy something, right-click and hit “Buy”:

To submit, you need money, so you will need to fund your account. This is done via the “Funds” button on the main screen – add funds. Remember that:

• The amount should be a multiple of Rs. 10000
• The price is 98.10, effectively for a face value of Rs. 100. You will actually be paying Rs. 9,810 on a face value of Rs. 10,000. It isn’t apparent, we know.
• You will also have to pay accrued interest. For the 2031 bond, the accrued interest as of December Rs. 255.86 per Rs. 10,000 as on 10th Dec 2021
• If the price gets traded, you get a hit.

 

The brilliant concept of funding and refunds

When you fund your bids, it will ask you to use UPI or net banking from the bank account you are registered. A screen like this pops up.

But what is brilliant is this: if you don’t have a trade on the same day, the money automatically comes back to you via UPI at the end of the day. They keep no balances! This is great because your money can continue to be with you except for the day when it’s traded.

Why bother with this stuff at all when you could buy a fixed deposit?

For an annuity: Currently, very few banks offer a fixed deposit matching the ten-year yield of roughly 6.36%. And no bank offers 40-year bonds at all, where government bonds are trading near 7%. Annuities from insurance companies offer much lower (roughly 5% to 6%), which is better done through a 40-year government bond instead. So if you want a 7% taxable, long term bond (>10 years), your best solution is a government bond at this point.

For peace of mind: This is the safest deposit in the country if you want to hold it all the way. You can take a loan against it very easily (banks will love to give a loan against govt bonds). Currently, no broker can provide a “margin” against this, but you can pledge for a loan.

Special bonds: There are special bonds called “STRIPS”, which allow you not to get any interest and instead only get the principal at the end of a term. This is useful to lock in an interest rate and not worry about reinvestment (you will know exactly how much you get at the end of the term). This is the subject of a different post, of course.

Note: A gilt mutual fund holds such bonds and technically provides similar yields to holding a government bond portfolio. Those are better for tax (you do not get charged tax if the gilt fund receives interest). There are also “target date” funds (such as for 2027, 2030) etc. which you can use to target a certain end-date. These may be better ways to participate in the government bond market if you are in the highest tax bracket or do not need the cash flow (regular interest) and want more easy liquidity than the government bond route.

Our View:

The retail government bond market is nascent, and the RBI platform to access it is new. The ability to buy government bonds directly from RBI allows retail investors to build really long term annuities. It’s not tax-efficient, but it does help in having peace of mind in terms of assured cash flow over decades. We encourage fixed-income investors to consider part of it for their long term cash flow needs. (Do check the disadvantages and alternatives in this article too!)

Extra: How to calculate the yield on a bond?

If you buy a 2031 bond paying a 6.1% coupon and pay Rs. 9820 on 2 December 2021, what is the return you’re getting? Use the formula in excel:

=YIELD(“2021-12-02”, “2031-07-12”, 6.1%, 98.2, 100, 2)

This says you have a bond bought on 2 Dec 2021, matures on 12 July 2031, pays 6.1% coupon, you pay Rs. 98.2 per Rs. 100, and interest is paid two times a year.

This will give you the answer: 6.35%

Now you might say listen; I get only Rs. 610 per year, and I invested Rs. 9820, so that’s only 6.21%. You are right. But you get back Rs. 10,000 at the end date, so that extra Rs. 180 is also a part of your return. This is what constitutes the “yield”. It isn’t apparent, we know, but you only have to get it once.

See our video on “What are bond yields?”