Reserve Bank of India’s (RBI) Retail Direct Scheme that allows retail investors to buy and sell government securities is gaining popularity among NRIs, according to wealth managers.

Vikram Dalal, managing director at Synergee Capital is quoted as saying in a report in The Economic Times  that they are receiving a lot of queries from NRI investors in the US, UK, Singapore, Dubai and other places.

There are many factors at play here. First, better yields on government bonds compared to interest rates abroad make the RBI scheme attractive. Besides, non-resident Indians (NRIs) face many restrictions when it comes to investing in other financial products in India.

Bond to yield a return of 6.91%

The Retail Direct Scheme of RBI allows NRIs to open accounts sitting overseas and buy government bonds. NRIs can buy the government bonds through their NRO bank accounts.

While interest rate in many developed economies is in the range of 1-2%, the yield on Government of India bonds is 6.5-7%.

According to Dalal, NRIs looking for a steady income stream to meet their parents’ cash flows, or to maintain their property back would want to buy these bonds.

A bond maturing in 2050 is available at a yield of 6.91%, while those maturing in 2058-2061 can give a yield of 7-7.1%, The Economic Times reported quoting financial planners.

Harshvardhan Roongta, chief financial planner, Roongta Securities, is quoted as saying that there is no cumulative option in these papers. Bonds give a fixed return and one can handle all the investments online, he added.

On the other hand, strict compliance norms make it very difficult for NRIs to directly invest in PSU or corporate bonds. Also, NRIs are allowed to invest in small savings schemes and postal schemes like public provident fund, Kisan Vikas Patra and National Savings Certificate. Mutual funds also usually do not accept NRI investments. They can, however, invest in bank fixed deposits and corporate deposits but they are not long-tenure deposits.

In long-tenure products, investors can lock in investments at prevailing rates. This gives predictable cash flows.

Investment adviser Jitendra Solanki is quoted as saying that the RBI scheme wherein NRIs can buy government securities gives sovereign guarantee and they are available with very long tenures.

The scheme, however, has the rupee depreciation risk, some financial planners have cautioned. The Economic Times quotes Vishal Dhawan, chief financial planner at Plan Ahead Wealth Managers, as saying that considering a rupee depreciation of 3%, the returns from these bonds will be lower to that extent. Financial planners have also flagged mark-to-market losses in a rising interest rate scenario and low liquidity in these bonds.