T-BILLS - ECONOMY

News: Bond, T-Bill yields see sharp rise as inflation spikes, liquidity tightens

 

What's in the news?

       A week after the Reserve Bank of India (RBI) opted for status quo in its monetary policy, yields on 10-year benchmark bonds and Treasury Bills rose sharply as retail inflation spiked to 7.44 percent in July, liquidity in the system tightened and pressure mounted on short-term interest rates.

Key takeaways:

       India’s benchmark 10-year bonds rose to 7.25 percent from the previous level of 7.20 percent and T-Bill yields rose by up to 13 basis points.

       Ten-year bond yields have gone up by 17 basis points in the last one month.

 

Treasury Bills (T Bills):

       Treasury bills or T-bills are short term debt instruments issued by the Government of India and are presently issued in three maturity periods of 91 days, 182 days, and 364 days.

       Treasury bills are zero-coupon securities as they do not carry any interest. Rather, these are issued at a discounted value and redeemed at the face value at the time of maturity.

       For example, a 182-day Treasury bill of Rs, 1000/- (face value) may be issued at say Rs. 998.20, that is, at a discount of say, Rs. 1.80 and would be redeemed at the face value of Rs. 1000/-

 

Features of Treasury Bills:

       A treasury bill is a promissory note issued by the RBI on behalf of the central government to meet the short-term liquidity requirement of the government.

       Treasury bills are highly liquid instruments.

       Return earned on treasury bills is the difference between the issue price and the face value. It is also known as the interest on the investment.

       Treasury bills (T-bills) offer short-term investment opportunities with almost no market risk. The maturity period of T-Bills is generally up to one year.

       There are no treasury bills issued by the State Governments.

       Treasury bills are sovereign and no transaction is charged unlike any other forms of investment. They are also issued under the Market Stabilization Scheme (MSS).

       Treasury bills are available for a minimum amount of Rs. 25,000 and in multiples of Rs. 25,000.

 

Financial institutions involved in T-Bills:

       Treasury bills are usually held by financial institutions including banks. They have a very important role in the financial market beyond investment instruments. Banks give treasury bills to the RBI to get money under repo. Similarly, they can keep it as part of SLR.

       T-Bills can be purchased by individuals, trusts, organizations, and banks. Financial institutions, on the other hand, are normally in charge of them. Beyond investment products, they play a critical function in the financial market.

       The Reserve Bank of India (RBI) also issues treasury bills as part of its open market operations (OMO) strategy to control inflation and individual spending/borrowing habits.

 

Difference from Commercial Bills:

       In India, the bill market is a subset of the money market. Treasury bills and commercial bills are the two types of bills. While the central government issues Treasury Bills, or T-Bills, financial entities issue Commercial Bills.

       T-bills have an advantage over conventional bills in that they have no risk-weighting attached to them.