Treasury bills, also known as T-bills, are short-term financial instruments issued by the Government of India. They are now available in three tenors: 91 days, 182 days, and 364 days. Treasury bills are zero coupon interest-free securities, they're sold at a discount and then redeemed at face value when they reach maturity. Treasury Bill is an important topic for the UPSC examination. In this article, we will see the meaning of Treasury bills, types and yield on treasury bills.

What is a Treasury Bill?

• Treasury Bills are short-term (up to one year) borrowing instruments issued by the Government of India or the central bank of the country that allow investors to store short-term surplus funds while lowering market risk.
• In 1917, India was the first country to print Treasury bills. The Reserve Bank of India (RBI) auctions them at regular intervals and issues them at a discount to face value.
• In India, the bill market is a subset of the money market. Treasury bills and commercial bills are the two types of bills. While the central government issues Treasury Bills, or T-Bills, financial entities issue Commercial Bills.'
• T-bills have an advantage over conventional bills in that they have no risk-weighting attached to them.
• They are issued by the government and have no risks attached to them. They have high liquidity due to their short maturities of 14 days, 91 days, 182 days, and 364 days.
• T-Bills can be purchased by individuals, trusts, organizations, and banks. Financial institutions, on the other hand, are normally in charge of them. Beyond investment products, they play a critical function in the financial market.
• To get money under repo, banks give the RBI treasury bills. They can also hold it if they need to meet their Statutory Liquid Ratio (SLR) standards.

Purpose of Treasury Bills

• A short-term treasury bill assists the government in raising funds to meet current obligations that exceed annual revenue generation. Its issuance aims to reduce an economy's total fiscal deficit while also regulating the total currency in circulation at any given time.
• The Reserve Bank of India (RBI) also issues treasury bills as part of its open market operations (OMO) strategy to control inflation and individual spending/borrowing habits. During times of economic boom that result in high and persistent inflation rates in the country, high-value treasury bills are issued to the public, reducing the aggregate money supply in an economy.
• It effectively dampens rising demand rates, resulting in higher prices that disproportionately affect the poorer segments of society.
• Alternatively, during times of recession and economic slowdown, the RBI implements a contractionary OMO regime through a reduction in treasury bill circulation and a reduction in the discounted value of the respective bonds.
• It disincentivizes individuals from channeling their resources into this sector, thereby increasing cash flows to stock markets instead, ensuring a boost in most companies' productivity.
• A rise in productivity has a positive impact on an economy's GDP and aggregate demand levels. As a result, a treasury bill is an essential monetary tool used by the RBI to regulate an economy's total money supply, as well as for fundraising purposes.

Types of Treasury Bills

Treasury Bills issued in India by the Reserve Bank of India is of the following types.

• 14-day treasury bill
• 91-day treasury bill
• 182-day treasury bill
• 364-day treasury bill

Yield on Treasury Bills

The yield generated by a Treasury Bill can be computed using the following formula:

Y= (F-P)/P X 365/D X 100.

Where Y denotes the percent of return.

F = face value of the treasury bill

P = Purchase price of a security at a discount, and

D= The term of a bill

For a better understanding, let's look at a treasury bill example.

If the RBI issues a discounted 91-day treasury bill, the face value of the bill is Rs. 100, whereas the discount price of the bill is Rs. 98.

Yield = (100-98)/98 X 365/91 x 100 = 8.19%

Features

• Minimum investment
  • Individuals interested in purchasing a short-term treasury bill must invest a minimum of Rs 25,000, according to RBI regulations. Any additional investment must be made in multiples of Rs. 25, 000.

• Zero-coupon rate securities
  • On total deposits, treasury bills pay no interest. Rather, investors will benefit from capital gains as a result of such events.
  • As a result, securities are sold in the market at a discounted rate. When this bond is redeemed, the entire par value is returned to you.
  • Bonds are paid to investors, allowing them to make significant gains on their whole investment.

• Trading
  • The manner of investment is an important aspect of treasury bill information.
  • The RBI auctions such securities in the market every week (on Wednesday) on behalf of the central government, based on the total bids placed on major stock exchanges.
  • Investors can purchase government assets through depository participant commercial banks or other registered primary dealers (PDs), with the security transfer taking place over a T+1 settlement period.

Advantages

• Risk-Free
  • Treasury bills, which are backed by the central government, are one of the most popular short-term government plans issued by the RBI. Such instruments are a burden for the Indian government because they must be repaid within a certain time frame.
  • As a result, individuals have complete security over their overall investments because they are supported by the country's highest authority and must be paid even during a financial crisis.
• Liquidity
  • A government treasury bill, as previously indicated, is issued as a short-term fundraising tool for the government and has the longest maturity duration (364 days).
  • Individuals who want to make short-term gains through safe investments might put their money into these products. Furthermore, such G-Secs can be resold on the secondary market, letting investors turn their holdings into cash in an emergency.
• Non-competitive bidding
  • Every week, the RBI holds a non-competitive auction of Treasury bills, allowing individual and small-scale investors to participate without having to quote the yield rate or price. It enhances amateur investors' exposure to the government securities market, resulting in increased cash flows to the capital market.

Limitations

• The main disadvantage of government treasury securities is that they have a reputation for yielding low returns.
• When compared to traditional stock market investment strategies. Treasury bills are zero-coupon securities that are sold to investors at a discount. As a result, regardless of economic conditions or business cycle swings, the overall returns earned by such instruments stay consistent during the bond's tenure.
• It differs from the stock market, where market fluctuations have a significant impact on both equity and debt returns. As a result, the yield rate of linked tools is much higher than the capital gains obtained from G Sec investments in the case of a stock market boom.
• Taxation
  • Short-term capital gains (STCG) on these bills are subject to STCG tax at rates determined by the investor's income tax bracket.
  • However, one important benefit of such G-Sec schemes is that retail investors do not have to pay any tax deducted at source (TDS) upon redemption of these bonds, minimizing the difficulties of claiming the same through income tax returns if they do not fall into the taxable income level.

Conclusion

Treasury Bills are short-term financial instruments issued by the government to meet its expenditure. These are used in the OMO by the Reserve Bank of India to control the money supply in the economy. These instruments are used by financial institutions to meet their reserve requirements and borrow from the RBI by pledging treasury bills.

FAQs

MCQs

1. What is the maturity period for Treasury Bills?

A) 30 days
B) 91 days, 182 days, and 364 days
C) 1 year
D) 2 years

2. How are Treasury Bills sold to investors?

A) Fixed price
B) Auction process
C) Direct purchase from RBI
D) Through brokers only

3. What type of return do Treasury Bills provide?

A) Fixed interest rate
B) Variable interest rate
C) Discount to face value
D) No returns

4. Which of the following is a benefit of investing in Treasury Bills?

A) High returns
B) Long-term investment
C) Safety and liquidity
D) Market volatility

5. What is a significant challenge associated with Treasury Bills?

A) High risk
B) Complexity in trading
C) Low returns compared to other investments
D) Lack of market

GS Mains Questions and Model Answers

Q1: Evaluate the role of Treasury Bills in managing government finance.

Answer: Treasury Bills play a critical role in managing government finance by providing a mechanism for short-term borrowing to meet immediate cash flow needs. When the government faces temporary deficits, T-Bills offer a way to raise funds quickly without resorting to long-term debt. This flexibility allows for better management of fiscal policies and helps maintain liquidity in the financial system. Moreover, T-Bills are used as instruments for monetary policy by the Reserve Bank of India, influencing interest rates and money supply. By adjusting the issuance of T-Bills, the government can effectively manage economic conditions, stabilize the financial market, and ensure that essential public services are funded promptly.

Q2: Discuss the significance of Treasury Bills for investors in the Indian economy.

Answer: For investors, Treasury Bills offer a safe and secure investment option within the Indian economy. Backed by the government, T-Bills are considered risk-free, making them an attractive choice for conservative investors seeking to preserve capital. They provide liquidity, as they can be easily bought and sold in the secondary market, and are ideal for short-term investment strategies. The predictable returns associated with T-Bills, derived from the discount at which they are issued, allow investors to plan their cash flows effectively. Furthermore, T-Bills contribute to overall financial stability in the economy by providing a benchmark for interest rates and influencing other financial instruments, thereby enhancing the functioning of the capital markets.

Q3: Analyze the challenges faced by Treasury Bills in the context of economic fluctuations.

Answer: Treasury Bills face several challenges in the context of economic fluctuations. During periods of economic uncertainty, investor confidence may wane, leading to reduced demand for T-Bills, which can result in lower liquidity. Additionally, fluctuations in interest rates can affect the attractiveness of T-Bills compared to other investment options, such as corporate bonds or equities, which might offer higher returns. Inflation poses another challenge, as the fixed returns from T-Bills may not keep pace with rising prices, eroding real returns for investors. Lastly, political and economic instability can impact government financing strategies, influencing the frequency and terms of T-Bill issuances. Addressing these challenges requires adaptive fiscal policies and robust economic management to ensure the continued relevance and attractiveness of Treasury Bills in the investment landscape.

Previous Year Questions on Treasury Bills

1. UPSC CSE Prelims 2021:

Question: What is the maturity period of Treasury Bills?

A) 30 days
B) 90 days
C) 91 days, 182 days, and 364 days
D) 1 year

Answer: (C)

Explanation: Treasury Bills are issued with maturity periods of 91 days, 182 days, and 364 days.

2. UPSC CSE Mains 2019 (GS Paper 1):

Question: Assess the impact of Treasury Bills on liquidity in the Indian financial system.

Answer: Treasury Bills significantly impact liquidity in the Indian financial system by providing a mechanism for short-term financing and cash flow management. When the government issues T-Bills, it injects liquidity into the market, facilitating the smooth functioning of financial institutions and fostering investor confidence. T-Bills also serve as a benchmark for short-term interest rates, influencing the yields on other financial instruments and helping to stabilize the financial market. During times of economic stress, T-Bills can provide a safe haven for investors seeking to mitigate risks, thereby enhancing overall market stability. The regular issuance and trading of T-Bills ensure that liquidity remains accessible, contributing to the resilience of the financial system.