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When the government goes to the financial market to raise money, it does so by issuing two types of debt instruments — treasury bills and government bonds. Treasury bills are issued when the government needs money for a short period. These bills are issued only by the central government, and the interest on them is determined by market forces.
What are maturity period of treasury bills?
Treasury bills, or T-bills, have a maximum maturity period of 364 days. So, they are categorised as money market instruments (money market deals with funds with a maturity of less than one year). At present, treasury bills are issued in three maturities — 91-day, 182-day and 364-day. In 1997 the government also issued 14-day immediate treasury bills.
When were treasury bills introduced? Who issues treasury bills and who can buy?
Treasury bills were first issued in India in 1917. They are issued via auctions conducted by the Reserve Bank of India (RBI) at regular intervals. Individuals, trusts, institutions and banks can purchase T-Bills. But they are usually held by financial institutions. 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 also keep it to fulfil their Statutory Liquid Ratio (SLR) requirements.
How do T-bills work?
Treasury bills are issued at a discount to original value and the buyer gets the original value upon maturity. For example, a Rs 100 treasury bill can be availed of at Rs 95, but the buyer is paid Rs 100 on the maturity date. The return on treasury bill depends on liquidity position in the economy. When there is a liquidity crisis, the returns are higher, and vice versa.
Are T-bills a safe investment instrument?
Treasury bills have an advantage over other market instruments because of the zero-risk weightage associated with them. The secondary market of T-Bills is very active and they have a higher degree of tradability.