What is ' Treasury Bill - T-Bill ' ?
A treasury bill is nothing but promissory note issued by the Government under discount for a specified period stated therein. The Government promises to pay the specified amount mentioned therein to the holder / bearer / investor of the instrument on the due date. The period does not exceed one year. It is purely a finance bill since it does not arise out of any trade transaction. It does not require any ‘grading’ or’ endorsement’ or ‘acceptance’ since it is claims against the Government.
Instead, the appreciation and, therefore, the value to you - comes from the difference between the discounted value you originally paid and the amount you receive back ( $10,000 ). In this case, the T-bill pays a 2.04% interest rate ( $200 / $9,800 = 2.04% ) over a three-month period.
STRUCTURE: 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 dematerialized form.OBJECTIVES :These are issued to raise funds for meeting expenditure needs and also provide outlet for parking temporary surplus funds by investors.
A treasury bill is nothing but promissory note issued by the Government under discount for a specified period stated therein. The Government promises to pay the specified amount mentioned therein to the holder / bearer / investor of the instrument on the due date. The period does not exceed one year. It is purely a finance bill since it does not arise out of any trade transaction. It does not require any ‘grading’ or’ endorsement’ or ‘acceptance’ since it is claims against the Government.
The
Government of any country issues money market instruments / debt instruments
offered to finance their short term requirements / Debt Obligations namely
T-Bill or Treasury bill, a short-term debt instrument by borrowing /
issuing by the
Central / State Government of India
Treasury
bill are issued only by the RBI on behalf of the Government. Treasury bills are
issued for meeting temporary Government deficits. The Treasury bill rate of
discount is fixed by the RBI from time-to-time. It is the lowest one in the
entire structure of interest rates in the country because of short-term
maturity and degree of liquidity and security. These were first issued in India
These
are discounted securities and thus are issued through a competitive
bidding process at a discount from par to face value, which means
that rather than paying fixed interest payments like conventional
bonds, the appreciation of the bond provides the return to the holder /
investor which is the difference between the maturity value and issue price.
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 maximize 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.
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 ( unsteady movements ) requirements.
Just like
commercial bills which represent commercial debt, treasury bills represent
short-term borrowings of the Government. Treasury bill market refers to the
market where treasury bills are brought and sold. Treasury bills are very popular
and enjoy higher degree of liquidity since they are issued by the government.
Also it can
be further termed as short-term debt obligation backed by the U.S.
For
example,
Let's say
you buy a 13-week T-bill priced at $9,800. Essentially, the U.S.
Instead, the appreciation and, therefore, the value to you - comes from the difference between the discounted value you originally paid and the amount you receive back ( $10,000 ). In this case, the T-bill pays a 2.04% interest rate ( $200 / $9,800 = 2.04% ) over a three-month period.
TYPES OF TREASURY BILLS :
There are
three different types of Treasury bills based on the maturity period and
utility of the issuance like, ad-hoc Treasury bills, 3 months,12months
Treasury bills etc, also namely 91-days, 182-days and 364-days
Treasury Bills, sold through a competitive bidding process
All T-bills are sold through an auction process, as per a fixed schedule announced by the Reserve Bank of India ( RBI ).
T-bills are available for a minimum amount of Rs 25,000. These instruments are issued at a discount to the face value. On maturity of T-Bill, the holder receives the face value.
* If the day of payment falls on a holiday, the payment is made on the day after the holiday.
( The instrument is quoted at a discount price to the par value of Rs 100. It is quoted in the secondary market on a yield basis with the minimum trade-able amount of Rs. 25000. The instrument is redeemed at par value with the difference between the issue price and par value being the return on the instrument )
Only a few institutions like state governments and Central Bank of Nepal are allowed to participate in the T-Bills auctions on a non-competitive basis whereby full amount of security is allocated at the yield determined at the auction.
In India, there are two types of treasury bills viz.
(I) ordinary or regular and
(ii) ‘ad hoc’ known as ‘ad hocs’
Ordinary treasury bills are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government. These bills are freely marketable and they can be brought and sold at any time and they have secondary market also.
On the other hand ‘ad hocs’ are always issued in favour of the RBI only. They are not sold through tender or auction. They are purchased by the RBI on top and the RBI is authorized to issue currency notes against them. They are marketable sell them back to the RBI. Ad hocs serve the Government in the following ways:
# They replenish ( to fill up again ) cash balances of the central Government. Just like
State Government get advance (ways and means advances) from the RBI, the Central
Government can raise finance through these ad hocs.
# They also provide an investment medium for investing the temporary surpluses of
State Government, semi-government departments and foreign central banks.
Ninety one days treasury bills are issued at a fixed discount rate of 4% as well as through auctions. 364 days bills do not carry any fixed rate. The discount rate on these bills are quoted in auction by the participants and accepted by the authorities. Such a rate is called cut off rate.
In the same way, the rate is fixed for 91 days treasury bills sold through auction 91 days treasury bills (top basis) can be re-discounted with the RBI at any time after 14 days of their purchase. Before 14 days a penal rate is charged.
In India, at present, the Treasury Bills in vogue are the 91-days and 364-days Treasury bills.
DENOMINATION :
Minimum amount of face value Rs.1 lakh and in multiples there of. There is no specific amount / limit on the extent to which these can be issued or purchased.
Maturity : 91 days and 364 days.
Rate of interest : Market determined, based on demand for and supply of funds in
the money market.
WHO CAN PURCHASE / INVEST IN T- BILLS ?
T-bills are predominantly held by banks. 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 organizations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills.
Today, even provident funds, mutual funds and trusts invest in T-bills. So, if you invest in a mutual fund scheme that invests in T-Bills, you can get an indirect exposure to such instruments.
Treasury bills can be purchased by any one (including individuals) except State govt. These are issued by RBI and sold through fortnightly or monthly auctions at varying discount rate depending upon the bids.
OPERATIONS AND PARTICIPANTS :
The RBI holds day’s treasury bills (TBs) and they are issued on top basis throughout the week. However, 364 days TBs are sold through auction which is conducted once in a fortnight. The date of auction and the last date of submission of tenders are notified by the RBI through a press release. Investors can submit more than one bid also.
On the next working day of the date auction, the accepted bids with prices are displayed. The successful bidders have to collect letters of acceptance from the RBI and deposit the same along with cheque for the amount due on RBI within 24 hours of the announcement of auction results.
Institutional investors like commercial banks, DFHI, STCI, etc, maintain a subsidiary General Ledger (SGL) account with the RBI. Purchases and sales of TBs are automatically recorded in this account invests who do not have SGL account can purchase and sell TBs though DFHI. The DFHI does this function on behalf of-investors with the helps of SGL transfer forms. The DFHI is actively participating in the auctions of TBs. It is playing a significant role in the secondary market also by quoting daily buying and selling rates. It also gives buy-back and sell-back facilities for period’s upto 14 days at an agreed rate of interest to institutional investors. The establishment of the DFHI has imported greater liquidity in the TB market.
The participants in this market are the followers:
RBI and SBI
Commercial banks
State Governments
DFHI
STCI
Financial institutions like LIC, GIC, UTI, IDBI, ICICI, IFCI, NABARD, etc.
Corporate customers
Public
Through many participants are there, in actual practice, this market is in the hands at the banking sector. It accounts for nearly 90 % of the annual sale of TBs.
Primary Market
A bid will have to be made in the weekly auctions of Treasury bills as given earlier. The bid will have to be submitted to RBI, Mumbai. The bid can be submitted to RBI, Mumbai, or through the bank / Primary Dealer with whom he has a Constituent SGL account.
Secondary Market
A treasury bill can be purchased at any point of time from the secondary market commensurate with the short term period for which funds are available.
ISSUANCE
As mentioned above, treasury bills are issued at a discount to the face value. In view of this, while submitting tenders under auction for subscription, a subscriber is required to quote the price in the case of treasury bills. The difference between the face value and the price is known as the discount on the treasury bill.
PRIMARY MARKET
HOW TO ENSURE TRANSPARENCY IN OPERATIONS ?
The rates at which Treasury Bills of different residual maturities are being traded
All SGL settlements of Treasury Bills are published in leading financial newspapers
The transactions once closed have to be confirmed in writing by both the parties
Transactions done through NSE brokers are available on NSE Screens.
EXAMPLE:
BENEFITS OF INVESTMENT IN TREASURY BILLS
of auction.
All T-bills are sold through an auction process, as per a fixed schedule announced by the Reserve Bank of India ( RBI ).
T-bills are available for a minimum amount of Rs 25,000. These instruments are issued at a discount to the face value. On maturity of T-Bill, the holder receives the face value.
The table
as under describes the types of T-Bills, day of auction and payments, and the notified amount of auction.
Type of
T.bills |
Day of Auction
|
Day of payment*
|
Amount (in Rs. Crores)
|
91-day
|
Wednesday
|
Following Friday
|
100
|
182-day
|
Wednesday of non-reporting week
|
Following Friday
|
500
|
364-day
|
Wednesday of reporting week
|
Following Friday
|
500
|
( The instrument is quoted at a discount price to the par value of Rs 100. It is quoted in the secondary market on a yield basis with the minimum trade-able amount of Rs. 25000. The instrument is redeemed at par value with the difference between the issue price and par value being the return on the instrument )
Only a few institutions like state governments and Central Bank of Nepal are allowed to participate in the T-Bills auctions on a non-competitive basis whereby full amount of security is allocated at the yield determined at the auction.
In India, there are two types of treasury bills viz.
(I) ordinary or regular and
(ii) ‘ad hoc’ known as ‘ad hocs’
Ordinary treasury bills are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government. These bills are freely marketable and they can be brought and sold at any time and they have secondary market also.
On the other hand ‘ad hocs’ are always issued in favour of the RBI only. They are not sold through tender or auction. They are purchased by the RBI on top and the RBI is authorized to issue currency notes against them. They are marketable sell them back to the RBI. Ad hocs serve the Government in the following ways:
# They replenish ( to fill up again ) cash balances of the central Government. Just like
State Government get advance (ways and means advances) from the RBI, the Central
Government can raise finance through these ad hocs.
# They also provide an investment medium for investing the temporary surpluses of
State Government, semi-government departments and foreign central banks.
Ninety one days treasury bills are issued at a fixed discount rate of 4% as well as through auctions. 364 days bills do not carry any fixed rate. The discount rate on these bills are quoted in auction by the participants and accepted by the authorities. Such a rate is called cut off rate.
In the same way, the rate is fixed for 91 days treasury bills sold through auction 91 days treasury bills (top basis) can be re-discounted with the RBI at any time after 14 days of their purchase. Before 14 days a penal rate is charged.
In India, at present, the Treasury Bills in vogue are the 91-days and 364-days Treasury bills.
AVAILABILITY :
All the treasury Bills are highly liquid instruments available both in the primary and secondary market.DENOMINATION :
Minimum amount of face value Rs.1 lakh and in multiples there of. There is no specific amount / limit on the extent to which these can be issued or purchased.
Maturity : 91 days and 364 days.
Rate of interest : Market determined, based on demand for and supply of funds in
the money market.
WHO CAN PURCHASE / INVEST IN T- BILLS ?
T-bills are predominantly held by banks. 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 organizations, Nepal Rashtra bank and even individuals are eligible to bid and purchase Treasury bills.
Today, even provident funds, mutual funds and trusts invest in T-bills. So, if you invest in a mutual fund scheme that invests in T-Bills, you can get an indirect exposure to such instruments.
Treasury bills can be purchased by any one (including individuals) except State govt. These are issued by RBI and sold through fortnightly or monthly auctions at varying discount rate depending upon the bids.
OPERATIONS AND PARTICIPANTS :
The RBI holds day’s treasury bills (TBs) and they are issued on top basis throughout the week. However, 364 days TBs are sold through auction which is conducted once in a fortnight. The date of auction and the last date of submission of tenders are notified by the RBI through a press release. Investors can submit more than one bid also.
On the next working day of the date auction, the accepted bids with prices are displayed. The successful bidders have to collect letters of acceptance from the RBI and deposit the same along with cheque for the amount due on RBI within 24 hours of the announcement of auction results.
Institutional investors like commercial banks, DFHI, STCI, etc, maintain a subsidiary General Ledger (SGL) account with the RBI. Purchases and sales of TBs are automatically recorded in this account invests who do not have SGL account can purchase and sell TBs though DFHI. The DFHI does this function on behalf of-investors with the helps of SGL transfer forms. The DFHI is actively participating in the auctions of TBs. It is playing a significant role in the secondary market also by quoting daily buying and selling rates. It also gives buy-back and sell-back facilities for period’s upto 14 days at an agreed rate of interest to institutional investors. The establishment of the DFHI has imported greater liquidity in the TB market.
The participants in this market are the followers:
RBI and SBI
Commercial banks
State Governments
DFHI
STCI
Financial institutions like LIC, GIC, UTI, IDBI, ICICI, IFCI, NABARD, etc.
Corporate customers
Public
Through many participants are there, in actual practice, this market is in the hands at the banking sector. It accounts for nearly 90 % of the annual sale of TBs.
HOW TO PURCHASE / INVEST IN TREASURY BILLS ?
Treasury bills can be purchased either from the primary market or the secondary market.Primary Market
A bid will have to be made in the weekly auctions of Treasury bills as given earlier. The bid will have to be submitted to RBI, Mumbai. The bid can be submitted to RBI, Mumbai, or through the bank / Primary Dealer with whom he has a Constituent SGL account.
Secondary Market
A treasury bill can be purchased at any point of time from the secondary market commensurate with the short term period for which funds are available.
ISSUANCE
As mentioned above, treasury bills are issued at a discount to the face value. In view of this, while submitting tenders under auction for subscription, a subscriber is required to quote the price in the case of treasury bills. The difference between the face value and the price is known as the discount on the treasury bill.
CALENDAR
OF AUCTION AS ANNOUNCED BY RESERVE BANK OF
|
|||
Treasury
Bills
|
Notified
amount
(Rs
crore)
|
Day of
auction
|
Day of
payment
|
91 days
|
250
|
Every
Friday
|
Following
Monday
|
364 days
|
1000
|
Wednesday
to coincide with reporting Friday
|
Following
Thursday
|
PRIMARY MARKET
In the
primary market, treasury bills are issued by auction technique.
SALIENT
FEATURES OF THE AUCTION TECHNIQUE !
The auction
of treasury bills is done only at Reserve Bank of India
Bids are received
at Mumbai office during banking hours i.e upto 2 pm on the date
of auction.
The bids
are received in terms of price per Rs 100. For example, a bid for 91 day
treasury
bill auction could be for Rs 97.50. Further, bids cannot be submitted with
prices for
more than two decimals.
The auction
committee of Reserve Bank of India
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
There are
two types of auction for treasury bills:
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.
This method
is followed in the case of 364days treasury bills and is valid only for
competitive
bidders.
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. This
method is
applicable in the case of 91 days treasury bills only.
MINIMUM
AMOUNT OF BIDS
Bids for
treasury bills are to be made for a minimum amount of Rs 25000/- only and
in
multiples thereof.
CLASSIFICATION
OF BIDS
The bids
submitted can be classified as competitive and non competitive
bids.
Competitive
Bids
Competitive
bids can be submitted by any person or institutions like, banks,
financial
institutions, Primary Dealers, firms, companies, corporate bodies,
institutions
and trusts in India
Non
Competitive Bids
There is a
provision to accept non- competitive bids in respect of all treasury
bills
auctions. State Governments, Provident Funds and Nepal Rashtra bank
are allowed
to submit non-competitive bids in the case of 91 days treasury bills.
In the case
of 364 days treasury bills however, only State Governments can
participate
as non-competitive bidders. The Reserve Bank of India
as a
non-competitive bidder in the auction. The unsubscribed portion of the
competitive
bids also devolves on the Reserve Bank of India
In the case
of non-competitive bids, only the amount is indicated. They do not
indicate
any price. All the non-competitive bids are accepted at the weighted
average
price of the competitive bids.
TO
SUMMARIZE,
The Reserve
Bank of India
maturities
as per the notified amount on pre announced auction dates.
The auction
for the notified amount is conducted on a competitive bid basis,
which are
submitted on a price basis.
Non-competitive
bids are also submitted and accepted, but the allotment is
outside the
notified amount and based only on quantity and not price.
For
consideration of competitive bidding, the bidding starts with the bid with
lowest
yield or highest price being awarded Treasury bills at their bid price.
Successively
higher yielding bids are accepted and are awarded Treasury bills
at their
bid price until the total amount accepted equals the notified amount.
The highest
yield accepted by the Reserve Bank of India
cut-off
yield and the corresponding price is called the cut-off price.
YIELD
CALCULATION
The yield
of a Treasury Bills is calculated as per the following formula:
Y =
(100-P)*365*100
—————————
P*D
—————————
P*D
Wherein Y =
discounted yield
P = Price
D = Days to maturity
P = Price
D = Days to maturity
The
following formulae can be used to calculate returns on Treasury bills, when
they are
sold prior to maturity:
1.
Effective yield for the time a Treasury Bill is held:
Gain or
loss in yield:
Days to
Maturity at date of sale x ( Purchase yield – sale yield )
No: of Days T-Bill is held
Example:
Assume that
a 91 Days Treasury Bills purchased at 9.90% is held for 30 days and
sold at
9.50%. The yield for the time Treasury bill was held would be calculated
as follows:
Days to
maturity at date of sale = 91-30 =61
No. of days
held = 30
Purchase
yield – Sale
Gain or
loss in yield = 61 x (
0.40 ) = 0.813
30
Return for
the time Treasury Bill was held =
Purchase
yield + (Gain or loss in yield) =
9.90% + 0.813 = 10.713 %
In other
words, the effective return for holding the Treasury Bill for 30 days works
out to
10.713%. Had the Treasury Bills been sold at a yield lower than 9.50% also,
the
effective return would have still been higher.
2. To find
the number of days a Treasury Bills must be held to break even in yield
Days to
maturity at date of sale =
Days to
maturity at date of purchase X Purchase yield
Sale
Example
Assume that
a 91 Days T Bills is bought at 9.90%.
How long
must it be held to avoid a loss if it is to be sold at 10%
Days to
maturity remaining at date of sale = 91 x 9.90
= 90
10
Days to
maturity at purchase = 91
Days to
maturity at sale = 90
Break even
period = 91 - 90
= 1 day.
The above
examples clearly indicate that even if the Treasury Bills are sold in the
secondary
market prior to maturity, the returns cannot be termed as speculative
yields. These
are actual yields that are determined by market conditions prevailing
at that
specific point of time.
FACTORS
LIKELY TO IMPACT YIELD MOVEMENTS:
Some of the
following factors are likely to have an impact on the secondary market
yield
movements of sovereign paper, both Government securities and Treasury bills:
# Government’s Borrowing programme Monetary
policies
# Liquidity in the financial systems
# Foreign Exchange fluctuations
# Economic & Political scenario
DAY COUNT
For
treasury bills the day count is taken as 365 days for a year.
This
concludes the primary phase of issuance of Treasury bills and thereafter
the
Treasury bills undergo trading in the secondary market until their maturity
dates.
SECONDARY
MARKET
PARTICIPANTS
The major
participants in the secondary market are scheduled banks, financial
Institutions,
Primary dealers, mutual funds, insurance companies and corporate
treasuries.
Other entities like cooperative and regional rural banks, educational
and
religious trusts etc. have also begun investing their short term funds in
treasury
bills.
ADVANTAGES
Market
related yields
Ideal
matching for funds management particularly for short term tenors of less
than 15 days. Transparency in operations as
the transactions would be put
through
Reserve Bank of India
quotes
offered by primary dealers for purchase and sale of treasury bills.
Certainty
in terms of availability, entry & exit
HOW TO
TRADE IN SECONDARY MARKET ?
Can contact the
dealer and obtain the quotes.
List of Primary Dealers in
Government Securities Market (As on July
06, 2011)
|
|
STAND
ALONE PRIMARY DEALERS
|
BANK
PRIMARY DEALERS
|
Deutsche
Securities (India) Pvt. Ltd.
5th Floor, Nirlon Knowledge Park, Block 1 Western Express Highway Goregaon (East) Mumbai- 400 063 Phone: (022) 66703066/3067/3068 Fax : 66703070 |
The Royal
Bank of
82, Sakhar Bhavan Nariman Point Mumbai - 400 021. Phone: (022) 66386100/66386131 , 66386132/128 |
ICICI
Securities Primary Dealership Limited
ICICI Centre H.T.Parekh Marg Churchgate Mumbai- 400 020 Phone: (022) 22882460/70, 66377421 |
Bank of
Treasury Operations Gr.Floor, Express Towers Nariman Point, Mumbai- 400 021 Phone: (022) 66323000 extn.3150 |
Morgan
Stanley India Primary Dealer Pvt. Ltd.
18F/19F, Tower 2, One Indiabulls Centre 841, Senapati Bapat Marg Mumbai – 400 013 |
Bank of
Specialised Integrated Treasury 4th & 5th Floor, C-34,G-Block,Bandra Kurla complex Bandra ( East) Mumbai - 400 051 |
Nomura
Fixed Income Securities Pvt. Ltd.
Ceejay House, 11th Level Plot F, Shivsagar Estate Dr.Annie Besant Road Worli Mumbai - 400 018 Phone - (022) 40374037 Fax - (022) 40374111 |
Canara
Bank
Treasury & Investment Operations Division, 223, Maker Chambers III, 7th Floor Nariman Point Mumbai-400 021 Phone: (022) 22864601/22800101-105 ,22661348 |
PNB Gilts
Ltd.
5, Sansad Marg Phone: Mumbai -(022) 22693315/17 |
Citibank
N.A
5th Floor,Citibank Centre Bandra Kurla Complex Bandra (E), Mumbai-400 051 Phone:(022) 40015453/51, 40015378 |
SBI DFHI
Ltd
3rd Floor, 23, J.N.Heredia Marg Ballard Estate Mumbai- 400 001 Phone:(022) 22625970/73 ,22610490 ,66364696 |
Corporation
Bank
Investment & International Banking Division 15, Mittal Chambers, Nariman Point Mumbai-400 021 Phone:(022) 22833238/22023304 , 22832429/22022796/22871054 |
STCI
Primary Dealer Limited
A/B1-801 (A Wing) 8th Floor Marathon Innova, Marathon Nextgen Compound Off Ganpatrao Kadam Marg, Lower Parel(W) Mumbai- 400 013 Phone:(022) 30031100, 66202261 /2200 |
HDFC Bank
Ltd.
Treasury Mid Office, 1st Floor,HDFC Bank House Senapati Bapat Marg,Lower Parel Mumbai- 400 013 Phone:(022) 24904702/4935/ 3899,66521372/9892975232 |
Goldman
Sachs (
951-A, Rational House Appasaheb Marathe Marg Prabhadevi Mumbai 400 025 |
Hongkong
and
Treasury Services 52/60,Mahatma Gandhi Road Mumbai- 400 001 Phone:(022) 22681031/34/33 ,22623329/22681031/34/38 |
J P
Morgan Chase Bank N.A,
Off Santacruz(East) Mumbai - 400 098 Phone -61573000 Fax- 61573990 & 61573916 |
|
Kotak
Mahindra Bank Ltd.
Treasury Operations 1st Floor,Bakhtawar Nariman Point,Mumbai -400 021. Phone:(022) 6659 6022/6454 ,66596235/6454 |
|
Standard
Chartered Bank
Financial Market Operation Crescenzo, 5th Floor Plot no. C-38 & 39, G – Block Bandra Kurla Complex Mumbai – 400 051 |
|
Axis Bank
Ltd.
Treasury Operation (SLR & Money Market) Corporate Office,4th Floor, Axis House Pandurang Budhkar Marg Worli Mumbai - 400 025 |
|
WTC Complex, Cuffe Parade Mumbai 400 005 |
|
HOW TO ENSURE TRANSPARENCY IN OPERATIONS ?
The rates at which Treasury Bills of different residual maturities are being traded
are
available in leading Financial Newspapers and can be compared with the
rates
available from other sources.
All SGL settlements of Treasury Bills are published in leading financial newspapers
on the
following day.
The transactions once closed have to be confirmed in writing by both the parties
giving full
particulars.
Transactions done through NSE brokers are available on NSE Screens.
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:
Funds
Available as on 1.1.2000 Rs. 200 crore
Deployment
in a project Rs. 200 crore
As per the
requirements
06.1.2000
Rs. 50 crore
13.1.2000
Rs.
20 crore
02.2.2000
Rs.
30 crore
08.2.2000
Rs.
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 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
Invest in
Treasury Bills of various maturities depending on the funds requirements
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.
PORTFOLIO
MANAGEMENT STRATEGIES
Strategies
for managing a portfolio can broadly be classified as active or passive
strategies.
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:
Return is
fixed or locked in at the time of investment itself.
The
exposure to price variations due to secondary market fluctuations is
eliminated.
There is no
risk of default on maturity.
BUY AND
TRADE
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
optimized
by actively trading the treasury bills in the secondary market before
maturity.
BENEFITS OF INVESTMENT IN TREASURY BILLS
Safety:
# Investments in T.Bills are highly safe since
the payment of interest and
Repayment of principal are assured by the
Government.
# They carry zero default risk since they are
issued by the RBI for and on behalf of
the Central Government.
# These are highly liquid and safe investment
giving attractive yield.
# Simplified settlement
# Transparency.
# Zero default risk being sovereign paper.
# No tax deducted at source.
# Transparent since they are issued by the
country's central bank.
Liquidity:
# Investments in TBs are also highly liquid
because they can be converted into
cash at any time at the option of the
inverts.
# The DFHI announces daily buying and selling
rates for TBs. They can be
discounted with the RBI and further
refinance facility is available from the RBI
against TBs. Hence there is a market for
TBs.
# Highly liquid money market instrument. They
can be traded in the secondary
market High degree of tradability and
active secondary market facilitates
meeting unplanned fund requirements.
Ideal
Short-Term Investment:
# Idle cash can be profitably invested for a
very short period in TBs. TBs are
available on top throughout the week at
specified rates.
# Financial institutions can employ their surplus
funds on any day. The yield on
TBs is also assured. Better returns
especially in the short term.
# Extremely liquid since institutions can park
their short term excess funds.
Ideal Fund
Management:
TBs are
available on top as well through periodical auctions. They are also
available in the secondary market. Fund managers of financial institutions build
portfolio of TBs in such a way that the dates of maturities of TBs may be
matched
with the dates of payment on their liabilities like deposits of short
term maturities.
Thus, TBs help financial manager’s it manage the funds
effectively and profitably.
Statutory
Liquidity Requirement:
As per the
RBI directives, commercial banks have to maintain SLR
(Statutory Liquidity
Ratio) and for measuring this ratio investments in TBs are taken
into account.
TBs are eligible securities for SLR purposes. Moreover, to maintain
CRR (Cash
Reserve Ratio). TBs are very helpful. They can be readily converted into
cash
and thereby CRR can be maintained. Approved assets for SLR purposes and
DFHI is
the market maker in these instruments and provide (daily) two way quotes to
assure liquidity.
Source Of
Short-Term Funds:
The
Government can raise short-term funds for meeting its temporary budget deficits
through the issue of TBs. It is a source of cheap finance to the Government
since the
discount rates are very low.
Non-Inflationary
Monetary Tool:
TBs enable
the Central Government to support its monetary policy in the economy.
For
instance excess liquidity, if any, in the economy can be absorbed through the
issue of TBs. Moreover, TBs are subscribed by investors other than the RBI.
Hence
they cannot be mentioned and their issue does not lead to any
inflationary pressure
at all.( Recommended reading: Treasury
bills and inflation control )
Hedging
Facility:
TBs can be
used as a hedge against heavy interest rate fluctuations in the call loan
market.
When the call rates are very high, money can be raised quickly against TBs
and
invested in the call money market and vice versa. TBs can be used in ready
orward transitions.
DEFECTS OF
TREASURY BILLS :
Poor Yield:
The yield
form TBs is the lowest. Long term Government securities fetch more interest
and
hence subscriptions for TBs are on the decline in recent times.
Absence Of
Competitive Bids:
Though TBs
are sold through auction in order to ensure market rates for the investors,
in
actual practice, competitive bids are competitive bids are conspicuously
absent.
The RBI is compelled to accept these non-competitive bids. Hence
adequate return
is not available. It makes TBs unpopular.
Absence Of
Active Trading:
Generally,
the investors hold TBs till maturity and they do not come for circulation. Hence,
active trading in TBs is adversely affected.
RETURNS
OFFERED :
The price of a government security in the markets is determined by the forces of demand and supply, as is the case in any market. It also depends on other factors such as:
The price of a government security in the markets is determined by the forces of demand and supply, as is the case in any market. It also depends on other factors such as:
# Economic conditions.
# General money market conditions, including the position of money supply in the
# General money market conditions, including the position of money supply in the
economy.
# Interest rates prevalent in the market and the rates of new issues.
# Credit quality of the issuer.
# Interest rates prevalent in the market and the rates of new issues.
# Credit quality of the issuer.
.
REPAYMENT :
The
treasury bills are repaid at par on the expiry of their tenor at the office of
the
Reserve
Bank of India
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