MONEY MARKET INSTRUMENTS :

TREASURY BILLS

Treasury Bills are money market instruments issued by RBI to finance the short term requirements of the Government of India. These are discounted securities and thus are issued at a discount to face value. The return to the investor is the difference between the maturity value and issue price.

In the short term category of investment instruments, the treasury bill carry the lowest risk. RBI issues these at
a prefixed date and of a fixed amount.

Treasury Bills are very useful instruments to deploy short term surpluses depending upon the availability and requirement. Even funds which are kept in current accounts can be deployed in treasury bills to maximise
returns. Banks do not pay any interest on fixed deposits of less than 15 days, or balances maintained in current accounts, whereas treasury bills can be purchased for any number of days depending on the requirements. This helps in deployment of idle funds for very short periods as well. Further, since every week there is a 91 days treasury bills maturing and every fortnight a 364 days treasury bills maturing, one can purchase treasury bills of different maturities as per requirements so as to match with the respective outflow of funds. At times when the liquidity in the economy is tight, the returns on treasury bills are much higher as compared to bank deposits even for longer term. Besides, better yields and availability for very short tenors, another important advantage of treasury bills over bank deposits is that the surplus cash can be invested depending upon the staggered requirements.

Example
Suppose party A has a surplus cash of ` 200 crore to be deployed in a project. However, it does not require the
funds at one go but requires them at different points of time as detailed below:

Funds Available as on 1.1.2015 Deployment in a project As per the requirements 06.1.2015 13.1.2015 02.2.2015 08.2.2015

200 crore 200 crore   50 crore 20 crore 30 crore 100 crore

 

Out of the above funds and the requirement schedule, the party has following two options for effective cash management of funds:

Option I

Invest the cash not required within 15 days in bank deposits

The party can invest a total of ` 130 crore only, since the balance ` 70 crores is required within the first 15 days. Assuming a rate of return of 6% paid on bank deposits for a period of 31 to 45 days, the interest earned by the company works out to ` 76 lacs approximately.

Option II
Invest in Treasury Bills of various maturities depending on the funds requirements

The party can invest the entire ` 200 crore in treasury bills as treasury bills of even less than 15 days maturity are also available. The return to the party by this deal works out to around ` 125 lacs, assuming returns on Treasury Bills in the range of 8% to 9% for the above periods.

There are four types of treasury bills :

(a) 14-days T bill

The Maturity is in 14 days. Its auction is on every Friday of every week. The notified amount for this auction is 100 crores.

(b) 91-days T bill

The Maturity is in 91 days. Its auction is on every Friday of every week. The notified amount for this auction is 100 crores.

(c) 182-days T bill

The Maturity is in 182 days. Its auction is on every alternate Wednesday (which is not a reporting week). The notified amount for this auction is ` 100 crores.

(d) 364-days T bill

The Maturity is in 364 days. Its auction is on every alternate Wednesday (which is a reporting week). The
notified amount for this auction is ` 500 crores.

A considerable part of the government’s borrowings is financed through T-bills of various maturities. Based on the bids received at the auctions, RBI decides the cut off yield and accepts all bids below this yield.

The usual investors in these instruments are banks who invest not only to invest their short-term surpluses but also to get benefitted for maintaining the Statutory Liquidity Ratio (SLR) requirements in T-bills is reckoned for the purpose of statutory reserves. FIIs so far have not been allowed to invest in this instrument.

These T-bills which are issued at a discount can be traded in the market. Most of the time, unless the investor requests specifically, these are issued not as securities but as entries in the Subsidiary General Ledger (SGL) which is maintained by RBI. The transactions cost on T-bill are non-existent and trading is considerably high in each bill, immediately after its issue and immediately before its redemption.

The yield on T-bills is dependent on the rates prevalent on other investment avenues open for investors. For instance, low yield on T-bills as a result of high liquidity in banking system due to by low call rates, would divert the funds from T-bills market to other markets. This would particularly be so, if banks already hold the minimum stipulated amount of (SLR) in government instrument.