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TREASURY BILLS

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Introduction

Treasury bills or T-bills, which are money marketinstruments, are short term debt instruments issued by theGovernment of India and are presently issued in threetenors, namely, 91 day, 182 day and 364 day.

Treasury bills are zero coupon securities and pay nointerest. They are issued at a discount and redeemed at theface value at maturity. For example, a 91 day Treasury billof Rs.100/- (face value) may be issued at say Rs. 98.20, thatis, at a discount of say, Rs.1.80 and would be redeemed atthe face value of Rs.100/-.

The return to the investors is the difference between thematurity value or the face value (that is Rs.100) and theissue price .

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The RBI conducts auctions usually every Wednesday toissue T-bills. Payments for the T-bills purchased aremade on the following Friday.

The 91 day T-bills are auctioned on every Wednesday.

The Treasury bills of 182 days and 364 days tenure areauctioned on alternate Wednesdays.

T-bills of 364 days tenure are auctioned on the

Wednesday preceding the reporting Friday while 182 T-bills are auctioned on the Wednesday prior to a non-reporting Fridays.

The Reserve Bank releases an annual calendar of T-billissuances for a financial year in the last week of March

of the previous financial year. The Reserve Bank of India announces the issue details

of T-bills through a press release every week.

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Types

Ordinary or Regular :- Ordinary treasury bills

are issued to the public and other financial

institutions for meeting the short-term

financial requirements of the Central

Government.

These bills are freely marketable and they can

be bought and sold at any time and they havesecondary market also.

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Ad-Hocs

Ad hocs are always issued in favor of the RBI only. Theyare not sold through tender or auction. They arepurchased by the RBI and the RBI is authorized to issuecurrency notes against them.

Ad hocs serve the Government in the following ways:

They replenish cash balances of the central Government.Just like State Government get advance (ways and meansadvances) from the RBI, the Central Government can

raise finance through these ad hocs.

They also provide an investment medium for investingthe temporary surpluses of State Government, semi-government departments and foreign central banks.

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Importance

Safety: Investments in TBs are highly safe since the payment ofinterest and repayment of principal are assured by theGovernment. They carry zero default risk since they are issued bythe RBI for and on behalf of the Central Government.

Liquidity: Investments in TBs are also highly liquid because they can

be converted into cash at any time at the option of the inverts. TheDFHI announces daily buying and selling rates for TBs. They can bediscounted with the RBI and further refinance facility is availablefrom the RBI against TBs. Hence there is a market for TBs.

Ideal Short-Term Investment: Idle cash can be profitably investedfor a very short period in TBs. TBs are available on top throughout

the week at specified rates. Financial institutions can employ theirsurplus funds on any day. The yield on TBs is also assured.

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Ideal Fund Management: TBs are available on top as well throughperiodical auctions. They are also available in the secondary market. Fundmanagers of financial institutions build portfolio of TBs in such a way thatthe dates of maturities of TBs may be matched with the dates of paymenton their liabilities like deposits of short term maturities. Thus, TBs helpfinancial managers it manage the funds effectively and profitably.

Statutory Liquidity Requirement: As per the RBI directives, commercialbanks have to maintain SLR (Statutory Liquidity Ratio) and for measuringthis ratio investments in TBs are taken into account. TBs are eligiblesecurities for SLR purposes. Moreover, to maintain CRR (Cash ReserveRatio). TBs are very helpful. They can be readily converted into cash andthereby CRR can be maintained.

Source Of Short-Term Funds: The Government can raise short-term fundsfor meeting its temporary budget deficits through the issue of TBs. It is asource of cheap finance to the Government since the discount rates arevery low

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Non-Inflationary Monetary Tool: TBs enable theCentral Government to support its monetary policy inthe economy. For instance excess liquidity, if any, in theeconomy can be absorbed through the issue of TBs.

Moreover, TBs are subscribed by investors other thanthe RBI. Hence they cannot be mentioned and theirissue does not lead to any inflationary pressure at all.

Hedging Facility: TBs can be used as a hedge againstheavy interest rate fluctuations in the call loan market.

When the call rates are very high, money can be raisedquickly against TBs and invested in the call moneymarket and vice versa. TBs can be used in readyforward transitions

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Defects

Poor Yield: The yield form TBs is the lowest. Long termGovernment securities fetch more interest and hencesubscriptions for TBs are on the decline in recent times.

Absence Of Competitive Bids: Though TBs are sold through

auction in order to ensure market rates for the investors, inactual practice, competitive bids are conspicuously absent.The RBI is compelled to accept these non-competitive bids.Hence adequate return is not available. It makes TBsunpopular.

Absence Of Active Trading: Generally, the investors holdTBs till maturity and they do not come for circulation.Hence, active trading in TBs is adversely affected.