If a retail investor is focused only on the coupon, and is willing to hold on to maturity, in the current context of the yield on 10-year bonds being around 6%, why would such an investor forsake the RBI’s 7.1% bond, whose only minus point is its lack of liquidity? In any case, a large swathe of retail investors, who happen to be subscribers to the National Pension System, do have decent exposures to government bonds, mediated by professional fund management expertise, at very low cost. Insurance companies are mandated to hold huge portions of their asset portfolios in government bonds, as well. A retail segment in government bonds can be viable only as part of retail participation in a vibrant market for debt, in general. Retail investors are unlikely to provide the nourishment for growth of the bond market. So long as regulation restricts investment to highly rated paper, the bond market is unlikely to take off. In India, the route to a developed debt market probably runs through debt issuances by lenders to small and medium enterprises with less than investment-grade rating and offering superior rates of return.
If the government were serious about drawing retail investors to the government bond market, it would allow gilts to be traded on stock exchanges through brokerages, whose apps populate the phones of young investors.