Ad-hoc Treasury Bills

Ad-hoc Treasury Bills were short-term debt instruments issued by the Government of India primarily to meet temporary mismatches between receipts and expenditures. In the context of banking, finance, and the Indian economy, Ad-hoc Treasury Bills played a significant historical role in government financing and monetary management, particularly prior to the reforms in public debt and fiscal discipline. Although they are no longer issued, their impact on monetary policy, inflation, and central banking practices remains an important area of study.
These instruments were closely linked to the relationship between the Government of India and the Reserve Bank of India and had long-term implications for fiscal responsibility and monetary stability.

Concept and Meaning of Ad-hoc Treasury Bills

Ad-hoc Treasury Bills were short-term securities issued by the central government and subscribed to exclusively by the Reserve Bank of India. Unlike regular Treasury Bills, which are auctioned in the open market, Ad-hoc Treasury Bills were created on demand to finance the government’s temporary cash shortfalls.
They carried a fixed rate of interest and did not have a predetermined maturity structure in the conventional sense. Instead, they were meant to be held by the central bank until they were converted into long-term government securities or repaid when government revenues improved.

Historical Background and Evolution

The practice of issuing Ad-hoc Treasury Bills emerged in the early decades after independence, when the Indian economy was characterised by planned development, limited tax revenues, and heavy public expenditure. The government frequently faced revenue-expenditure mismatches and relied on the Reserve Bank of India to bridge these gaps.
Over time, Ad-hoc Treasury Bills became a convenient but excessive source of financing for fiscal deficits. Their increasing use led to automatic monetisation of government deficits, as the RBI created money to subscribe to these instruments. This practice gradually raised concerns regarding inflationary pressures and erosion of monetary discipline.

Mechanism of Issuance and Operation

The issuance of Ad-hoc Treasury Bills followed a non-market-based mechanism. Whenever the government’s cash balance with the RBI fell below a certain level, Ad-hoc Treasury Bills were automatically issued to replenish funds.
The operational features included:

• Subscription exclusively by the Reserve Bank of India.
• Fixed and relatively low interest rates.
• Absence of competitive market pricing.
• Automatic monetisation of fiscal deficits.

This mechanism effectively allowed the government to finance deficits without immediate market scrutiny or borrowing costs reflecting fiscal risk.

Role in Government Financing

Ad-hoc Treasury Bills were primarily used to finance revenue deficits rather than capital expenditure. They enabled uninterrupted government spending on administration, welfare schemes, and development programmes.
While they provided short-term liquidity support, over-reliance on these instruments weakened fiscal discipline. The ease of access reduced incentives for expenditure control and revenue mobilisation, contributing to persistent fiscal imbalances.

Implications for Monetary Policy

From a monetary policy perspective, Ad-hoc Treasury Bills posed significant challenges. Since the RBI had limited discretion in subscribing to these instruments, monetary policy independence was constrained. The expansion of money supply resulting from automatic monetisation often conflicted with the RBI’s objective of controlling inflation.
As fiscal deficits widened, the accumulation of Ad-hoc Treasury Bills increased reserve money, fuelling inflationary pressures and complicating liquidity management. This highlighted the inherent conflict between fiscal needs and monetary stability.

Impact on the Banking and Financial System

The widespread use of Ad-hoc Treasury Bills affected the broader banking and financial system by distorting interest rate signals. Since government borrowing costs were artificially low, market-based pricing of risk was undermined.
Banks and financial institutions operated in an environment where fiscal dominance reduced the effectiveness of monetary instruments. This limited the development of a deep and efficient government securities market during the period when Ad-hoc Treasury Bills were prevalent.

Phasing Out and Policy Reforms

Recognising the adverse implications of Ad-hoc Treasury Bills, major reforms were undertaken in the 1990s as part of India’s broader economic liberalisation. A landmark agreement between the Government of India and the Reserve Bank of India in 1994 initiated the phased elimination of Ad-hoc Treasury Bills.
They were formally abolished in 1997 and replaced by a system of Ways and Means Advances, which imposed quantitative limits and interest costs on temporary government borrowing from the RBI. This reform marked a decisive shift towards market-based government financing and improved fiscal-monetary coordination.

Significance for Fiscal Discipline

The discontinuation of Ad-hoc Treasury Bills strengthened fiscal discipline by forcing the government to rely more on market borrowing and transparent mechanisms. Borrowing costs became more reflective of fiscal conditions, encouraging better expenditure management and revenue planning.
For the RBI, the reform enhanced operational autonomy and effectiveness in monetary policy implementation, reducing inflationary bias arising from fiscal dominance.

Relevance in the Contemporary Indian Economy

Although Ad-hoc Treasury Bills are no longer in use, they remain highly relevant in understanding India’s fiscal and monetary history. They provide important lessons on the risks of automatic deficit financing and the importance of clear institutional boundaries between fiscal and monetary authorities.
In academic and policy discussions, Ad-hoc Treasury Bills are often cited as an example of how unchecked monetisation can undermine macroeconomic stability.

Overall Importance in Banking, Finance, and the Indian Economy

Ad-hoc Treasury Bills played a crucial but controversial role in India’s post-independence economic management. While they helped finance government operations during periods of resource constraint, their long-term impact highlighted the dangers of fiscal indiscipline and excessive central bank financing.