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Treasury Bills
Treasury Bills
Provident funds, by their very nature, need to invest in risk free securities that also provide them a
reasonable return. Government securities, also called the gilt edged securities or G-secs, are not
only free from default risk but also provide reasonable returns and, therefore, offer the most
suitable investment opportunity to provident funds.
The Government securities comprise dated securities issued by the Government of India and
state governments as also, treasury bills issued by the Government of India.Reserve Bank of
India manages and services these securities through its public debt offices located in various
places as an agent of the Government.
Treasury Bills
Types
Treasury bills (T-bills) offer short-term investment opportunities, generally up to one year. They
are thus useful in managing short-term liquidity. At present, the Government of India issues three
types of treasury bills through auctions, namely, 91-day, 182-day and 364-day. There are no
treasury bills issued by State Governments.
Amount
Treasury bills are available for a minimum amount of Rs.25,000 and in multiples of Rs. 25,000.
Treasury bills are issued at a discount and are redeemed at par. Treasury bills are also issued
under the Market Stabilization Scheme (MSS).
Auctions
While 91-day T-bills are auctioned every week on Wednesdays, 182-day and 364-day T-bills are
auctioned every alternate week on Wednesdays. The Reserve Bank of India issues a quarterly
calendar of T-bill auctions which is available at the Banks’ website. (URL:http://www.rbi.org.in). It
also announces the exact dates of auction, the amount to be auctioned and payment dates by
issuing press releases prior to every auction.
Payment
Payment by allottees at the auction is required to be made by debit to their/ custodian’s current
account.
Participation
Provident funds can participate in all T-bill auctions either as competitive bidders or as non-
competitive bidders. Participation as non-competitive bidders would mean that provident funds
need not quote the price at which they desire to buy these bills. The Reserve Bank allots bids to
the non-competitive bidders at the weighted average price of the competitive bids accepted in the
auction. Allocations to non-competitive bidders are in addition to the amount notified for sale. In
other words, provident funds do not face any uncertainty in purchasing the desired amount of T-
bills from the auctions.
T-bills auctions are held on the Negotiated Dealing System (NDS) and the members
electronically submit their bids on the system. Non-competitive bids are routed through the
respective custodians or any bank or PD which is an NDS member.
Dated Securities
Government paper with tenor beyond one year is known as dated security. At present, there are
Central Government dated securities with a tenor up to 30 years in the market.
Auction/Sale
Dated securities are sold through auctions. Fixed coupon securities are sometimes also sold on
tap that is kept open for a few days. Of late, the issuance of Central/state Government dated
securities are being done through auctions.
Announcement
A half yearly calendar is issued in case of Central Government dated securities, indicating the
amounts, the period within which the auction will be held and the tenor of the security, which is
made available on Reserve Bank’s website. The Government of India and the Reserve Bank also
issue a press release to announce the sale, a few days (normally a week) before the auction. The
press release is widely reported in the print media and wire agencies. The government of India
also issues an advertisement in the leading financial newspapers. The announcement of
auctions/sales and their results are published on the Reserve Bank website
(URL:http://www.rbi.org.in)
Amount
Auctions are conducted electronically on PDO-NDS system. The bids are submitted by the
members on PDO-NDS system both on their own behalf as well as on behalf of their clients
Provident funds can submit their bids competitive/non-competitive to their respective custodian or
to any bank/PD who is an NDS member.
Payment
The payment by successful bidders is made on the issue date, as specified in the auction
notification, usually the working day following the auction day.
The tenor of state government securities is normally ten years. State government securities are
available for a minimum amount of Rs.10,000 and in multiples of Rs.10,000. These are available
at a fixed coupon rate. The auctions for State Government securities are held electronically on
PDO-NDS module.
Availability of G-secs
Apart from purchasing government securities in the primary issuance, i.e. through auctions/sales,
all types of government paper can also be purchased from the secondary market. Primary
Dealers also purchase and sell securities. ((Source : RBI ))
((Source: Private)) Treasury Bills are money market instruments 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.
Types Of Treasury Bills There are different types of Treasury bills based on the
maturity period and utility of the issuance like, ad-hoc Treasury bills, 3 months, 6
months and 12months Treasury bills etc. In India, at present, the Treasury Bills are
issued for the following tenors 91-days, 182-days and 364-days Treasury bills.
Features
Form
The treasury bills are issued in the form of promissory note in physical form or by
credit to Subsidiary General Ledger (SGL) account or Gilt account in dematerialised
form.
Minimum Amount Of Bids Bids for treasury bills are to be made for a minimum
amount of Rs. 25000/- only and in multiples thereof.
Eligibility:
All entities registered in India like banks, financial institutions, Primary Dealers,
firms, companies, corporate bodies, partnership firms, institutions, mutual funds,
Foreign Institutional Investors, State Governments, Provident Funds, trusts, research
organisations, Nepal Rashtra bank and even individuals are eligible to bid and
purchase Treasury bills.
Repayment
The treasury bills are repaid at par on the expiry of their tenor at the office of the
Reserve Bank of India, Mumbai.
Availability
All the treasury Bills are highly liquid instruments available both in the primary and
secondary market.
Day Count
For treasury bills the day count is taken as 365 days for a year.
Yield Calculation
(100-P)*365*100
Y = ------------------
P*D
Example
A cooperative bank wishes to buy 91 Days Treasury Bill Maturing on Dec. 6, 2002 on
Oct. 12, 2002. The rate quoted by seller is Rs. 99.1489 per Rs. 100 face values. The
YTM can be calculated as following:
The days to maturity of Treasury bill are 55 (October – 20 days, November – 30
days and December – 5 days)
Similarly if the YTM is quoted by the seller price can be calculated by inputting the
price in above formula.
Primary Market
The auction of treasury bills is done only at Reserve Bank of India, Mumbai.
Bids are submitted in terms of price per Rs. 100. For example, a bid for 91-day
Treasury bill auction could be for Rs. 97.50.
Auction committee of Reserve Bank of India decides the cut-off price and results
are announced on the same day.
Bids above the cut-off price receive full allotment; bids at cut-off price may receive
full or partial allotment and bids below the cut-off price are rejected.
Types Of Auctions
Multiple Price Based or French Auction: Under this method, all bids equal to or
above the cut-off price are accepted. However, the bidder has to obtain the
treasury bills at the price quoted by him.
Uniform Price Based or Dutch auction: Under this system, all the bids equal to
or above the cut-off price are accepted at the cut- off level. However, unlike the
Multiple Price based method, the bidder obtains the treasury bills at the cut-off
price and not the price quoted by him.
Advantages
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 treasury bills auction, 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 Rs. 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:
Option I
The party can invest a total of Rs. 130 crore only, since the balance Rs. 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 Rs. 76 lacs approximately.
Option II
The party can invest the entire Rs. 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 Rs. 125 lacs, assuming returns on Treasury Bills in the range of
8% to 9% for the above periods.
Buy And Hold A buy and hold strategy can be described as a passive strategy since
the Treasury bills once purchased, would be held till its maturity. The salient features
of this strategy are:
This strategy can also be described as an active market strategy. The returns on this
strategy are higher than the buy and hold strategy as the yield can be optimised by
actively trading the treasury bills in the secondary market before maturity.
((Source: Private))