What are Treasury Bills in India?

The Government finances developmental endeavours with tax revenues & foreign debt. But is that enough? What if tax collections are low? What if no country is willing to lend? Well, read on to understand.

The Government, like all of us, earns revenues and incurs the expenditure. It expends for the development of society, healthcare, infrastructure and other sectors where private participation is not fully feasible. For this, the major form of revenue is the tax revenue. Other forms could be grants and gifts, profits from public enterprises, securities issued, etc. Let’s dive deep into the securities it issues.

The government issues various kinds of securities, also known as G-securities in the open market. These could be long term, like government bonds that mature anywhere between 5 years to 40 years, or dated G- securities or short term instruments.

Today’s article will provide you with a clear idea about these short-term government securities called Treasury bills.

Treasury Bills: T-Bills

A treasury bill or what is more popularly known as a T-bill, is a short-term money market instrument issued by the Government. These are usually issued by the Reserve Bank of India on behalf of the Central Government.

T-bills are presently issued in three tenors, namely, 91 days, 182 days, and 364 days. The 91-day bills are issued weekly, while the 182-day and 364-day bills are issued bi-weekly.

The main aim is to meet the short term financial requirements of the Government. Not only that, these are also issued in the open market to regulate the inflation level of the economy and the spending/ borrowing habits of individuals.

India - Treasury Bills (over 31 days)

(Source: Moody’s Analytics)

Features of a T-bill

The features of a T-bill are as follows:

• Low investments

Investments in T-bill can be done with a minimum amount of Rs.25,000 and further in multiples of Rs.25,000. This does cater to small and new investors who are looking to start investing.

• Issue price and repayment

These T-bills are issued at a discount and not on their par value. Redemption, though, is done on par value or premium. The difference amount is treated as the interest that an individual receives for investing in these securities. The interest rate is determined by market forces.

• High Liquidity

Treasury bills are highly liquid negotiable instruments available in both Financial markets, i.e., primary and secondary markets.   

• Method of auction

The 91 day T-bill is issued through a uniform auction method, whereas 364 day T-bills are issued through multiple auction methods.

• Yield rate 

The formula to calculate the yield on a T- bill is 

Y = (100-P)/P x 365/D x 100

wherein:

Y = Percentage of return,

P = Price at which the security is purchased

D = Tenure of a bill.

Applying this formula helps one compute the yield on T-bills, as the bills do not come with any specified interest rates. This also helps one compare these with similar securities.

How do T-bills work?

First issued in 1917, treasury bills are issued by the Government through an auction. The Reserve Bank of India announces the details of these treasury bills every week on its website. The auction is open for individual investors, banks, trusts and other institutions. 

As previously discussed, T-bills are also issued to regulate any inflationary fluctuations in the economy. And how, you ask?

During a boom when the cash flow in the economy is on the higher side, the Government issues these bills in order to encourage individuals to save and also curb the money supply. Contrarily, during the phase of depression, the money supply is lower. So the bills issued are redeemed in order to correct the situation.

Timeline of the auction

The RBI issues a calendar of T-bill auctions. It also does a press release prior to each auction to announce the exact dates & amount to be auctioned.

For instance, 14 day and 91 day T-bills are auctioned on Friday every week, the payment for which needs to be made by the following Saturday. On the other hand, 182 day T-bills are auctioned on Wednesdays of the non-reporting week, and 364 day T- bills are auctioned on Wednesdays of reporting week. The payment for both these needs to be made by the following Thursday.

(Reporting week basically is a week of the month wherein banks submit reports displaying their net demand and time liabilities to the RBI.)

Types of T-bill

T-bills are available with varying maturity periods. One classification of these bills are based on when they are redeemed. The types of T-bills available are 14 day, 91-day, 182-day and 364-day T-bills. The number of days mentioned implies the maturity period of the bill. 

Another classification divides T-bills into ordinary and ad-hoc treasury bills. On the one hand, ordinary treasury bills are those issued in the open market through auction to meet short term financial requirements of the central Government. On the other hand, Ad-hoc treasury bills are issued in order to provide investment outlets to state governments, semi-government departments and foreign central banks for their temporary surpluses. 

Advantages of T-bills

T-bills do provide various advantages to their holders. Let’s discuss a few of them:

• High liquidity

T-bills are money market instruments issued for a short term, i.e. less than a year. Also, like shares and other securities, these can be sold in the secondary market. This implies that these securities are highly liquid. One can easily liquidate these investments to meet any cash requirements. 

• Non-competitive bidding

Non- competitive bidding is a practice where a bidder does not have to quote the yield or price in the bid. T-bills are issued through non-competitive bidding, which allows individual and retail investors to freely participate in the bidding process. This encourages new potential investors to explore the government securities market.

• Negligible risk

As these are issued by RBI on behalf of the Government, the risk factor involved in T-bills is almost negligible. Come what may, the Government is obliged to repay the amount invested by an investor. The investor does not deal with any kind of risk.

Disadvantages of T-bill

A few drawbacks that T-bills have are:

• Lower returns

The basic rule of investment states returns are directly proportional to the risk that an instrument holds. Lower the risk; lower would be returns expected. Similarly, as T- bills have almost no risk attached, the returns are also on the lower side. If one is looking to earn good returns, this might not be the preferred avenue to park the funds.

Also, the interest rate or the coupon rate does not fluctuate with fluctuations in the market. A predetermined interest is paid. This implies lower returns compared to other similar securities.

• Tax liability

Another drawback is that the short term capital gains (STCG) earned on these securities is taxable under the Income Tax law as per the slab rates. However, if one does not fall under the tax bracket, they need not pay TDS on the same. 

The interest rate of T-bills

The interest rates that these bills provided for the last few months are summarised below:

Type	June 19, 2020	May 21, 2021	May 28, 2021	June 4, 2021	June 11, 2021	June 18, 2021
91 Day T-bill	3.29	3.38	3.40	3.41	3.40	3.47
182 Day T-bill	3.48	3.58	3.60	3.65	3.64	3.70
364 Day T-bill	3.56	3.73	3.73	3.74	3.76	3.85

Should you invest?

Now that we’ve understood all the details of treasury bills, one question might arise in your mind. Should you invest in these? The answer is simpler than you think it is. If you are a risk-averse investor looking for a short term investment product, this one shouldn’t be missed. There are also certain mutual funds that provide government securities.

Also, government securities are one of the best ways to diversify portfolio. It helps balance the portfolio risk.  

Final words

Treasury bills are one of the powerful tools used by the Government to regulate the cash flow in the economy. It is also an amazing investment product that caters to the needs of most kinds of investors. It does have its own set of pros and cons that need to be weighed carefully before investing. 

Happy Investing!