Treasury Bills in India: What They Are, Their Types, and How They Work

In India, treasury bills largely refer to short-term money sector instruments that act as promissory notes with the assurance of repayment in the future. The money accumulated through these money instruments is meant to help the government in its short-term requirements, thus contributing effectively to the decrease of the nation’s typical fiscal shortfall. Treasury bills also act as short-term borrowing instruments, with a maximum tenure of almost one year, and are given at a reduced value compared to the insignificant worth of government securities (G-sec). In addition, they feature zero coupons or interest rates.

We will delve deeper to learn more about treasury bills and their use in India. 

What are Treasury bills in India?

Also called T-bills, treasury bills simply refer to short-term money market tools. The Reserve Bank of India (RBI) is committed to reducing liquidity deficits on the side of the government of India. A treasury bills can also be considered as a promissory note that come with a payment assurance in the future. The funds collected through these bills are meant to help the government in fulfilling its short-term fund-related needs. The purpose behind raising the funds this way is to bring down the overall deficit of the country. 

Treasury bills or T-bills come with zero-coupon rates, which means no interest will be carried. People can buy T-bills at a reduced rate to the face/value. In the future, these bills can be encashed at a nominal price, thereby enabling the investors to get the difference. Hence, it is an important monetary tools used by the Reserve Bank of India. Its another purpose is to help RBI to control the overall money supply in the country’s economy and raise funds.

Background of Treasury Bills in India

Treasury bills were initially launched in India in 1917. These instruments are discharged through auctions done by the Reserve Bank of India (RBI) at various times. People, trusts, organizations, and banks are eligible to buy T-Bills. However, in most cases, they are typically held by financial institutions. They play an extremely crucial role in the financial sector beyond investment instruments. Banks lend treasury bills to the Reserve Bank of India to secure funds under repo. In a similar way, T-bills can also keep it to meet their Statutory Liquid Ratio (SLR) needs.

Major Traits of Treasury Bills in India

• Treasury bills are provided in a physical form similar to a promissory note or dematerialized format by trusting an SGL account (Subsidiary General Ledger Account).
• Treasury bills come at the lowest value of Rs.25000 and in the same multiples thereof.
• Treasury bills come at a reduced price. However, they can be encashed at par value at the time of maturity.
• People, businesses, organizations, trusts, banks, insurance firms, provident funds, local governments, and financial institutions are qualified to buy T-bills.
• Treasury bills come with high liquidity and negotiability. T-bills come in both primary and secondary financial markets.
• The 91-day T-bill is based on a uniform auction process. On the other hand, a 364-day T-bill is based on a multiple auction method.
• There is an assurance of repayment with zero risks of default.
• In the case of treasury bills, the day count is 364 days a year.
• In addition, it has other features like an assured yield, low transaction costs, an auction sales method, and a market-driven discount rate, and it is issued to address short-term cash flow mismatches.

Different Types of Treasury Bills in India

There are mainly four types of treasury bills and the underlying difference lies in the holding period. 

14-day Treasury bill

These bills are found to mature in 14 days from the issuance date. Their auction takes place on Wednesday, and the payment is done on subsequent Friday. This happens every week. Such types of treasury bills are sold in multiples of Rs.1 lakh, and the minimum investment is Rs.1 lakh.

91-day Treasury bill

These bills are found to mature in 91 days from the issuance date. Their auction takes place on Wednesday, and the payment is done on subsequent Friday. This happens every week. Such types of treasury bills are sold in multiples of Rs.25000, and the minimum investment is Rs.25000.

182-day Treasury bill

These bills are found to mature in 182 days from the issuance date. Their auction takes place on Wednesday, and the payment is done on subsequent Friday. Such types of treasury bills are sold in multiples of Rs.25000, and the minimum investment is Rs.25000.

364-day Treasury bill

These bills are found to mature in 364 days from the issuance date. Their auction takes place on Wednesday, and the payment is done on subsequent Friday. Such types of treasury bills are sold in multiples of Rs.25000, and the minimum investment is Rs.25000.

The holding period for every T-bill remains common. Treasury bills’ face value and discount rates, can be susceptible to cyclical vacillations. This mainly relies on the total number of bids received, RBI monetary policy, and financial requirements.

How do treasury bills work?

Treasury bills are allotted at a reduced rate from their initial value and the original value is given to the purchaser at the time of maturity. For instance, a Rs. 100 treasury bill can be purchased at Rs. 95, but the buyer is given Rs. 100 at the time of maturity. The yield on the treasury bill relies on the liquidity placement in the country’s economy. In the case of a liquidity crisis, the returns tend to get higher.

Yield Calculation Formula

The yield produced by a Treasury Bill can be measured using the following formula:

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

where Y refers to the percent of return.

F = face value of the treasury bill

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

D= The duration of a bill

How to invest in treasury bills in India?

Investing in T-bills in India is quite simple when processed through regular channels. People who are willing to invest in treasury bills can contact renowned units such as primary dealers and commercial banks or take part in auctions done by the Reserve Bank of India (RBI). A few mandatory things are a Demat account, other necessary documents, and KYC formalities. Treasury bills in India come for various time periods, usually 91 days, 182 days, and 364 days. 

Must Read: RBI Revises Calendar for Auction of Treasury Bills

A person needs to take part in the auction by specifying the desired amount and bid yield. Fruitful bids lead to the allocation of treasury bills, in Demat format, delivering a secure investment avenue. Timely and continuous monitoring of auction schedules helps in easy investment in treasury bills.

Who can invest in treasury bills?

Any individual or business can buy treasury bills who is driven by the purpose of securing excess money safely and reliably. It is mostly preferred by people who don’t want to take high risks on their investments. 

Treasury bills in India can be invested by anyone who wants to secure their surplus funds in a safe and reliable investment. It is particularly suitable for individuals who are risk-averse and prefer low-risk options.

The Conclusion

Treasury bills are considered significant money market instruments allocated by the government to individuals and businesses to meet their short-term financial needs. These bills comes with an optimum tenure of 364 days and can be availed at a discounted price without interest. This is why they act prominently when it comes to handling the country’s fiscal deficit. Treasury bills are an excellent choice for short-term borrowing as they promote general financial stability and liquidity of a country’s economy.