Treasury Bills (T-Bills)

Treasury Bills (T-Bills) areshort-term debt instrumentsissued by the Central Government of India.

They are crucial components of the money market and are managed by theReserve Bank of India (RBI).

Treasury Bills were introduced in India for the first time in1917.

Why in News?

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This action, executed through theState Bank of India (SBI), provides crucial financial support to the island nation grappling with economic challenges and debt.

Thisinterest-free arrangementis part of a unique government-to-government understanding that began in 2019. It reflects India's 'Neighbourhood First' policy and its strategic interest in the Indian Ocean region.Purpose of a Treasury BillThe primary purpose of T-Bills is to enable the Central Government to meet its temporary mismatches in cash flow and short-term financial requirements, ie,meeting short-term funding needs of the government.This helps in managing the country'sfiscal deficit.The RBI uses T-Bills as amonetary toolfor conductingOpen Market Operations (OMOs) to manage liquidity in the economy.Selling T-Bills absorbs excess liquidity, while buying them injects liquidity. This helps in regulatinginflationandoverall money supply.For investors, T-Bills offer one of thesafest and most liquid investment avenuesin the Indian financial market, as they are backed by thesovereign guaranteeof the Government of India.IssuanceOnly theCentral Governmentcan issue T-Bills in India. State Governments do not issue T-Bills, but they can issue State Development Loans (SDLs), which are generally long-term bonds.TheReserve Bank of India (RBI) managesthe issuance of T-Bills on behalf of the Central Government.  They are also issued under theMarket Stabilization Scheme (MSS).Market Stabilization Scheme (MSS)The Market Stabilization Scheme (MSS) is amonetary policy toolintroduced by the RBI in2004.Its primary purpose is to absorb excess liquidity from the financial system, often arising from large capital inflows.Under MSS, the government issues additional securities, including T-Bills and dated securities (bonds), which are then sold by the RBI.The proceeds from these issues are kept in a separate account with the RBI and are not used for government expenditure.This ensures that the absorption of liquidity is distinct from normal government borrowing.Treasury Bills can be held in physicalpromissory note form, though this is now rare.The prevalent method is thedematerialized form, either by crediting to anSGL (Subsidiary General Ledger) Accountmaintained with the RBI for institutions, or aDemat Account via depositoriesfor retail investors.This electronic holding enhances efficiency and safety.Features of a Treasury BillThe minimum investment amount for T-Bills is₹25,000and in multiples of Rs. 25,000.Short-Term MaturityT-Bills havematurity periods of less than one year. In India, they are currently issued in three standard tenures:91-day T-Bills182-day T-Bills364-day T-BillsHistorically, 14-day T-Bills were also issued, but the active ones are the three mentioned above.Auctioning ProcessT-Bills are issued through aweekly auctionconducted by the RBI on its electronic platform,E-Kuber. ThePublic Debt Office (PDO)of the RBI acts as its registry/depository.While91-day T-billsare typically auctionedevery week, both182-day T-billsand364-day T-billsare auctionedevery alternate weekby the Reserve Bank of India (RBI).In India, the auction methods for Treasury Bills differ based on their maturity:91-day T-billstypically follow auniform price auction method.In this method, all successful bidders are allotted the T-bills at a single, uniform price(the cut-off price/yield discovered in the auction).364-day T-bills (and often 182-day T-bills)follow amultiple price auction method. In this method, successful bidders are allotted the T-bills at the exact price/yield they bid, provided it is at or below the cut-off price/yield.Both competitive and non-competitive bidding are allowed.Non-competitive bidding allows smaller investors, including individuals, to participate without having to quote a yield or price.Zero-Coupon SecuritiesT-Billsdo not pay any periodic interest (coupon). Instead, they are issued at a discount to their face value and are redeemed at their full face value upon maturity.The return to the investor is the difference between the discounted issue price and the face value.Eg:-  A T-Bill with a face value of ₹100 might be issued at ₹98. On maturity, the investor receives ₹100, making a profit of ₹2.High LiquidityDue to their short maturity and government backing, T-Bills are highly liquid and can be easily traded in the secondary market.Risk-Free (Gilt-Edged)T-Bills are considered practically risk-free as they carry the sovereign guarantee, implying almost no risk of default. This is why they are often referred to as 'gilt-edged' securities.SLR RequirementCommercial banks often hold T-Bills to meet theirStatutory Liquidity Ratio (SLR)requirements set by the RBI. They can also be used as collateral for repo transactions with the RBI.TaxationThe return earned on T-Bills (the difference between the issue price and face value) is treated asshort-term capital gainand istaxableas per the investor's applicable income tax slab.ConclusionTreasury Bills are vital short-term borrowing instruments for the government, a key monetary policy tool for the RBI, and a safe, liquid investment avenue for both institutional and retail investors.They form an essential part of the Indian financial ecosystem, contributing tofiscal management, liquidity control,andmarket stability.Thanks for reading!!!