Treasury bills or T-bills, are money market instruments issued by the Government of India. They are primarily short-term borrowing tools and are presently issued in three tenors, namely, 91 days, 182 days,s and 364 days. Funds collected through such tools are typically used to meet short-term requirements of the government and, hence, to reduce the overall fiscal deficit of a country.
Treasury bills are zero coupon securities and pay no interest. Instead, they are issued at a discount and redeemed at the face value at maturity. For example, a 91-day treasury bill with a face value of Rs. 100 can be bought at a discounted price of Rs. 98.50. Upon maturity, the buyer is eligible to receive the entire nominal value of Rs. 100, which allows him to realise a profit of Rs. 1.50.
The RBI has made it easy for retail investors to invest in treasury bills and other government bonds. The RBI launched ‘RBI Retail Direct’ platform in 2021 to allow retail investors to buy different government securities. An investor can open an account on the Retail Direct platform and start buying different government securities. Unlike bank fixed deposits where the interest rate is known at the time of investment, the treasury bills do not pay any interest rate. Therefore, Treasury bills are known as zero coupon securities However, the RBI announces the indicative yield before the weekly auction starts.
The percentage of yield generated from a treasury bill can be calculated through the following formula –
Y = (100-P)/P x 365/D x 100
Where Y = Return per cent
P = Discounted price at which a security is purchased, and
D = Tenure of a bill
Let us consider a treasury bill example for better understanding. If the RBI issues a 91-day treasury bill at a discounted value of Rs. 98.50 while the face value of the bill is Rs. 100, the yield on such G-Secs can be determined as follows –
Yield = (100 – 98.50)/98.50 x 365/91 x 100 = 6.10%
Treasury bill as a monetary tool:
The Treasury bill is an integral monetary tool used by the RBI to regulate the total money supply in an economy, along with its fundraising usage. The Reserve Bank of India (RBI) treasury bills under its open market operations (OMO) strategy to regulate its inflation level and spending/borrowing habits of individuals. During times of high inflation rates, high-value treasury bills are issued to the public, which, thereby, reduces the aggregate money supply in an economy. On the other, a contractionary OMO regime is undertaken by the RBI during times of recession and economic slowdown through a reduction in Treasury bill circulation and reduced discounted value of the respective bonds. It disincentives individuals into channeling their resources in this sector, thereby boosting cash flows to the stock markets instead, ensuring a boost in the productivity of most companies. Such a rise in productivity has a positive impact on the GDP and aggregate demand levels in an economy.
