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Treasury Bills (T-Bills): What You Need to Know to Invest

Treasury bills (T-bills) are an important part of India’s financial system, acting as a cornerstone of government debt management as well as a vital investment vehicle for individuals and organisations. They are short-term debt instruments issued by the Government of India with three maturities of 91, 182, and 364 days to raise funds for a variety of objectives, including supporting the government’s budgetary needs and managing liquidity in the financial system. In this post, we will review the many varieties of Treasury notes in India, their features, benefits, and how they work.

What Are Treasury Bills and How Do They Work in India?

Treasury bills, often known as T-bills, allow subscribers to profit from their investments by redeeming them at face value. The RBI issues treasury bills as part of its open market activities. These bills are typically issued during times of economic boom and high or continuous inflation to manage the aggregate money supply. As a result, the fast-rising prices affecting the poorer sections of the population will be reduced. Let us use treasury bills as an example:

Assume you purchase a few treasury bills of INR 150 each at a discounted rate of INR 145. In the future, at maturity, you can redeem it for INR 150 and earn INR 4 profit per unit.

Calculation of T-Bill Yield

Treasury bills, as previously stated, provide assured returns. A Treasury bond yield measures the annual return on your investment. In other words, if you made a 5 INR profit over 91 days on a Rs. 100 investment, how much would you gain yearly at this rate?

The formula for calculating the T-bill return is as follows:

Yield = [Profit Value]/[Bond Price] * [365/days to maturity]

Using this approach to calculate Treasury bill yield,

 Treasury Bill Yield = [5/100] * [365/ 91]

= 20.05%

Various Types of Treasury Bills in India

In India, there are primarily three types of Treasury bills issued by the government:

  1. 91-Day T-Bills: These have a maturity period of 91 days, making them the shortest-term T-bills available. They are often used to manage short-term liquidity needs.
  2. 182-Day T-Bills: With a maturity period of 182 days, these bills provide investors with a slightly longer investment horizon while maintaining a relatively short-term focus.
  3. 364-Day T-Bills: These are the longest-term T-bills available in India, with a maturity period of 364 days. They are useful for investors looking for a slightly longer investment horizon while still maintaining the benefits of T-bills.

What Factors Influence Treasury Bill Prices?

Treasury notes pricing and returns are influenced by the following factors:

  • Market Risk: In the case of other forms of government securities, market risk is caused by the adverse movement of the assets’ prices as a result of interest rate changes. It leads to valuation losses. On the other hand, Treasury bills do not pique investors’ curiosity. They do provide guaranteed returns as a result of the discounted issuance of treasury bills.
  • Inflation: The returns on treasury notes can be affected by inflation. For example, if you obtain a 3% return on investment and the inflation rate is 5%, your investment in government security may be rendered ineffective.
  • Government Funding Requirements: The government issues Treasury bills in order to generate the funds needed to support its short-term needs. As a result, T-bill prices are influenced by the funding requirement and the RBI’s monetary policy.

Salient Features of Treasury Bills

Here are some major characteristics of Indian Treasury bills:

1. Auction Process: T-bill auctions are conducted by the Reserve Bank of India (RBI) on behalf of the government. These auctions are open to both individuals and institutions.

2. Competitive and Non-Competitive Bidding: India, like the rest of the world, allows both competitive and non-competitive bidding. 

  1. Competitive Bidding: Investors use competitive bidding to specify the yield at which they are ready to buy T-bills. Bids are rated according to yield, and the highest accepted bids are filled until the government’s financing requirements are reached.
  2. Non-Competitive Bidding: Non-competitive bidding investors accept the yield determined by competitive bidding. They are guaranteed T-bills if they bid at or over the minimum purchasing amount.

3. Discount Rate: T-bills are issued at a discount to face value in India, and the difference between the purchase price and face value indicates the investor’s return. The discount rate determines the yield.

4. No Interest Payment: T-bills in India do not pay interest on a regular basis, unlike certain other fixed-income instruments. Instead, at maturity, investors receive the face value.

5. Guaranteed Returns: Treasury bills have a fixed rate of return. Even when purchased at a discount, they are always redeemed at face value, providing a return to the investor.

The Advantages of Investing in Treasury Bills in India

  • Safety: Treasury bills are regarded as one of the safest investment alternatives in India because they are backed by the government. The chance of default is almost nonexistent.
  • Liquidity: T-bills are extremely liquid instruments. They are easily sold on the secondary market prior to maturity, giving investors flexibility.
  • Diversification: Treasury notes can be an important component of a well-diversified investment portfolio, providing stability and acting as a hedge against riskier assets.
  • Competitive Yields: Treasury bonds offer competitive rates compared to other short-term investments, such as savings accounts or fixed deposits, despite their minimal risk.
  • Tax Benefits: Treasury bill interest income is taxed in India; however, it is known for providing investors with favourable tax treatment, especially compared to regular fixed deposits.

The Bottom Line
Treasury bills are a foundational investment option that provides safety, liquidity, and competitive yields for investors. They are a cornerstone of the fixed-income market and play a crucial role in the broader financial system. While they may not offer the potential for high returns like some riskier investments, T-bills are a valuable tool for preserving capital and achieving short-term financial goals. Investors should carefully consider their investment objectives and risk tolerance when incorporating Treasury bills into their portfolios.