Sunday, June 3, 2012

J.TREASURY BILLS

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.

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. They are promissory notes issued at discount and for a fixed period

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 in 1917.

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.

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. government with a maturity of less than one year. T-bills are sold in denominations of $1,000 up to a maximum purchase of $ 5 million and commonly have maturities of one month (four weeks), three months (13 weeks) or six months (26 weeks).

For example,
Let's say you buy a 13-week T-bill priced at $9,800. Essentially, the U.S. government (and its nearly bulletproof credit rating) writes you an IOU ( I Owe you ) for $10,000 that it agrees to pay back in three months. You will not receive regular payments as you would do with a coupon bond, for example. 

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.


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
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
* 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.

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 INDIA FOR 1999-2000
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, Mumbai.
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 decides the cut-off price and the
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 participates
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 conducts the auction of treasury bills of varying
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 is referred to the
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      

Wherein Y = discounted yield
               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 yield        = 9.90 – 9.50 = + 0.40
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 yield
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’s SGL or Client’s Gilt account only Two way
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 Scotland N.V.
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 America
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 Baroda
Specialised Integrated Treasury
4th & 5th Floor, Baroda Sun Tower
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
New Delhi- 110 001
Phone:  Mumbai -(022) 22693315/17
New Delhi (011) 23325751,22693315/17
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, Voltas House,
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 (India) Capital Markets Pvt. Ltd.
951-A, Rational House
Appasaheb Marathe Marg
Prabhadevi
Mumbai 400 025
Hongkong and Shanghai Banking Corpn. Ltd.(HSBC)
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, Mumbai Branch
J.P. Morgan Tower

Off C.S.T. Road, Kalina
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
Bombay Dyeing Compound
Pandurang Budhkar Marg
Worli
Mumbai - 400 025

IDBI Bank Ltd.
IDBI Tower

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:
#   Economic conditions.
#   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.
REPAYMENT :
The treasury bills are repaid at par on the expiry of their tenor at the office of the
Reserve Bank of India, Mumbai. 

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