Treasury Bills

Treasury Bills, commonly known as T-Bills, are short-term debt instruments issued by the Government of India through the Reserve Bank of India (RBI) to meet short-term funding requirements. They are considered the safest form of investment as they carry zero default risk and are backed by the sovereign guarantee of the government. Treasury Bills form a crucial part of the money market, playing a key role in managing liquidity and implementing monetary policy.

Nature and Characteristics

Treasury Bills are money market instruments with maturities of less than one year. Unlike bonds, they do not carry any interest coupon. Instead, they are issued at a discounted price and redeemed at their face value upon maturity. The difference between the issue price and the redemption value represents the investor’s return or discount yield.
Key characteristics of Treasury Bills include:

• Issuer: Government of India.
• Tenure: Currently available in maturities of 91 days, 182 days, and 364 days.
• Form: Issued in dematerialised form through the RBI’s electronic platform.
• Yield: Determined by the difference between the discount issue price and face value.
• Risk: Virtually risk-free, as repayment is fully guaranteed by the central government.
• Transferability: Freely tradable in the secondary market, ensuring high liquidity.

Historical Background

The concept of Treasury Bills in India dates back to 1917, when the British government introduced them to finance short-term budgetary deficits. After independence, the RBI assumed responsibility for issuing and managing Treasury Bills as part of its monetary operations.
Over the decades, the Treasury Bill market has evolved significantly, with reforms aimed at broadening participation and improving transparency. The introduction of auction-based issuance in 1986 replaced the fixed-rate system, aligning the process with market dynamics. With the establishment of the Negotiated Dealing System (NDS) and Real-Time Gross Settlement (RTGS), the Treasury Bill market became more efficient and accessible.

Types of Treasury Bills in India

The Government of India issues different types of Treasury Bills, classified mainly by their maturity period:

1. 91-Day Treasury Bills:
   • Issued weekly.
   • Primarily used for meeting temporary short-term funding requirements.
   • Popular among banks for liquidity management.
2. 182-Day Treasury Bills:
   • Issued bi-weekly.
   • Provide moderate-term investment options for institutional investors.
3. 364-Day Treasury Bills:
   • Issued bi-weekly.
   • Cater to investors seeking slightly higher returns with minimal risk.

Earlier, 14-day T-Bills were also issued but were discontinued in 2001 due to limited demand.

Issuance and Auction Mechanism

The RBI issues Treasury Bills on behalf of the Government of India through competitive auctions conducted on the E-Kuber platform. The auctions are open to a wide range of participants, including banks, financial institutions, primary dealers, and non-competitive bidders such as individuals and mutual funds.
There are two types of bids:

• Competitive Bids: Investors specify the discount rate (yield) they are willing to accept.
• Non-Competitive Bids: Investors agree to accept the yield determined in the auction, ensuring participation without active rate bidding.

The minimum bidding amount is ₹10,000, and bids can be made in multiples thereof. Once issued, T-Bills are credited to the Subsidiary General Ledger (SGL) accounts or demat accounts of investors.

Pricing and Yield Calculation

Treasury Bills are issued at a discount and redeemed at face value, typically ₹100. The discount rate determines the investor’s yield.
The yield can be calculated using the following formula:
Yield (%)=(F−P)P×365N×100\text{Yield (\%)} = \frac{(F – P)}{P} \times \frac{365}{N} \times 100Yield (%)=P(F−P)​×N365​×100
Where:

• F = Face value,
• P = Purchase price,
• N = Number of days to maturity.

For example, if a 91-day T-Bill with a face value of ₹100 is purchased at ₹98, the yield is approximately 8.16% per annum.

Participants in the Treasury Bill Market

The Treasury Bill market attracts a diverse range of participants due to its safety and liquidity. The main participants include:

• Commercial Banks: Major investors who use T-Bills to meet Statutory Liquidity Ratio (SLR) requirements.
• Primary Dealers: Act as market makers and underwriters.
• Mutual Funds and Insurance Companies: Invest in T-Bills for safe short-term returns.
• Corporate Houses: Park surplus funds temporarily.
• Individuals and Non-Resident Indians (NRIs): Participate through non-competitive bidding routes.

The RBI and the Government encourage retail participation to promote broader access to government securities.

Importance in the Indian Economy

Treasury Bills play several significant roles in India’s financial and economic system:

• Liquidity Management: Help the RBI regulate short-term liquidity in the banking system.
• Monetary Policy Implementation: Serve as a tool for open market operations (OMO) to control money supply.
• Benchmark for Short-Term Interest Rates: The yield on T-Bills serves as a reference for other money market instruments.
• Government Financing: Provide a cost-effective source of short-term borrowing for the government.
• Safe Investment Avenue: Offer investors a low-risk, high-liquidity option.

Advantages of Treasury Bills

• Safety: Backed by the Government of India, eliminating default risk.
• Liquidity: Easily tradable in the secondary market.
• Attractive for Institutions: Meet regulatory investment requirements such as SLR.
• Transparent Pricing: Issued through public auctions, ensuring fairness.
• No Tax Deducted at Source (TDS): The discount income is taxable, but no TDS is deducted at issuance.

Limitations

• Low Yield: Returns are generally lower compared to other instruments like corporate deposits or bonds.
• Limited Retail Participation: The market is dominated by institutional investors, though retail interest is increasing gradually.
• Short Tenure: Not suitable for long-term investment goals.
• Interest Rate Sensitivity: Prices fluctuate with changes in short-term interest rates.

Recent Developments

Recent years have seen multiple reforms to improve participation and transparency in the Treasury Bill market:

• The RBI has facilitated retail investor access through the Retail Direct Scheme (2021), allowing individuals to buy T-Bills directly.
• Introduction of electronic trading platforms such as NDS-OM (Negotiated Dealing System – Order Matching) for secondary market transactions.
• Integration of Primary Dealers as key intermediaries to ensure market liquidity.
• Use of T-Bill yields as a benchmark for pricing short-term instruments like certificates of deposit (CDs) and commercial papers (CPs).