In a major debt market reform, retail trading in government papers (gilts) was launched on Thursday enabling small investors to buy gilts through stock exchanges.

The scheme was launched by Finance Minister Jaswant Singh who bought 10 units of securities bearing an interest rate of 11.10 per cent maturing in April.

"This has opened a new investment opportunity for retail and small investors," Singh said.

The next major step would be the introduction of interest rate derivatives, the modalities of which are being worked out by a committee under the RBI and assisted by officials from Sebi, Finance Secretary S Narayan said.

"The step was being taken to check long-term volatility in interest rate, which will be contained by interest rate derivatives. This will probably be in place very soon," he said.

Elaborating on the order-driven, screen-based retail trade in G-secs, Narayan said the retail trade initially could be carried out only through the National Stock Exchange, the Bombay Stock Exchange and the Over-The-Counter Exchange of India in demat form.

Investors can buy gilts in about 400 cities from 10,000 terminals of the three bourses. The minimum amount that can be invested is Rs 1,000 (10 units at face value of Rs 100 each).

RBI Deputy Governor Rakesh Mohan, speaking after the launch function, said: "G-secs are not totally risk-free. Prices will vary depending upon interest rate movements. It will, however, be secure till maturity. Being sovereign papers, G-secs are the safest avenue for investments."

Referring to the Rs 6,50,000 crore (Rs 6,500 billion) G-secs market, Chairman of the Securities and Exchange Board of India G N Bajpai said the entry of retail investors will ensure higher liquidity and result in price discovery of government papers.

Bajpai said G-secs would be traded in the T+3 (transaction date plus three) system as applicable to equities. "They will be traded in T+2 from April 2003, and subsequently in T+1 from April 2004," he added.

The market regulator has asked the bourses to set up separate trade guarantee funds, which would be related to the volume of transactions.

There are more than 150 central government securities in the market and all dated securities would be available for retail trade.

However, no state government papers are being allowed for retail trade now.

Treasury bills, state government and other securities, which are as eligible as G-secs, would be introduced for retail trade in phases by RBI in consultation with Sebi.