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.