by Treasury Bills (T–Bills) are short-term debt instruments issued by the Government of India to meet short-term liquidity needs. They are issued at a discount and redeemed at face value, with the difference representing the interest earned. T-Bills have maturities of 91 days, 182 days, and 364 days, and are considered risk-free as they are backed by the government. They are auctioned by the Reserve Bank of India (RBI) and widely used by banks, corporations, and financial institutions for parking surplus funds. T-Bills play a key role in managing liquidity and supporting monetary policy operations.
History of Treasury Bills (T-Bills):
- History of Treasury Bills (T-Bills) Outside India:
Treasury Bills originated in England in the late 19th century as a short-term financing instrument for the British government. They were initially used during wartime to raise immediate funds. The concept was later adopted by other nations, including the United States in 1929, primarily to manage liquidity and regulate the money supply. The U.S. Treasury introduced T-Bills during the Great Depression to support government spending without increasing long-term debt. Since then, T-Bills have become a global standard for risk-free, short-term borrowing and are actively traded in most developed and emerging financial markets.
- History of Treasury Bills in India:
In India, Treasury Bills were first introduced in 1917 during British rule, mainly for managing the fiscal needs of the colonial government. After independence, their use expanded under the oversight of the Reserve Bank of India (RBI), which began issuing T-Bills regularly to finance short-term government deficits and manage liquidity. Over the decades, especially post-economic liberalization in the 1990s, the T-Bill market evolved with greater transparency and wider participation from banks, mutual funds, and corporations. Today, T-Bills play a critical role in India’s money market and are integral to monetary policy and government debt management.
Types of Treasury Bills (T-Bills):
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91-Day Treasury Bills
The 91-day Treasury Bills are the shortest maturity T-Bills issued by the Government of India through the Reserve Bank of India (RBI). They are auctioned weekly and are used primarily for short-term funding and liquidity management. Issued at a discount and redeemed at face value, these T-Bills are popular among banks, mutual funds, and institutional investors due to their short tenure and low risk. They serve as a safe investment vehicle for managing surplus funds and are an important tool in the RBI’s monetary policy operations.
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182-Day Treasury Bills
The 182-day Treasury Bills are medium-term short-duration instruments issued by the Government of India. These are auctioned bi-weekly and cater to investors looking for slightly higher returns than 91-day T-Bills, while still retaining liquidity. Like other T-Bills, they are issued at a discount and redeemed at par. These instruments are widely used by institutional investors for managing temporary surplus funds and as collateral in financial transactions. Their moderate maturity period offers a balance between safety, return, and tenure flexibility.
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364-Day Treasury Bills
The 364-day Treasury Bills have the longest maturity among all T-Bills in India, offering higher yields due to their extended duration. Auctioned weekly, they are suited for investors with a one-year investment horizon seeking secure returns. Issued at a discount and redeemed at face value, these T-Bills are ideal for banks, financial institutions, and large corporates to manage year-long liquidity or investment cycles. They also serve as benchmark instruments in India’s short-term debt market and reflect the government’s short-term borrowing cost over a full year.
Uses of Treasury Bills (T-Bills):
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Government Fundraising
Treasury Bills are a key tool for the Government of India to raise short-term funds to meet temporary budget deficits or manage seasonal cash flow mismatches. Issued by the Reserve Bank of India on behalf of the government, T-Bills provide a low-cost, risk-free borrowing option without increasing long-term debt. They help in meeting urgent expenditure requirements without resorting to higher-interest borrowing. Their short maturity and guaranteed repayment make them a reliable mechanism for the government to manage fiscal operations efficiently and flexibly.
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Liquidity Management by RBI
The Reserve Bank of India uses T-Bills as an important monetary policy instrument to manage liquidity in the financial system. Through open market operations (OMO), the RBI buys or sells T-Bills to either inject or absorb liquidity. Selling T-Bills helps reduce excess money supply, while purchasing them adds liquidity. This helps maintain price stability and control inflation. The liquidity adjustment facility (LAF) also uses T-Bills as collateral for repo and reverse repo transactions, thus influencing short-term interest rates and maintaining monetary discipline in the economy.
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Safe Investment for Institutions
T-Bills are widely used by banks, mutual funds, insurance companies, and other institutional investors as a safe, short-term investment option. They are considered virtually risk-free since they are backed by the sovereign guarantee of the Government of India. These instruments help institutions park surplus funds securely while earning modest returns. Banks also use T-Bills to meet statutory liquidity ratio (SLR) requirements. Their high liquidity allows easy trading in the secondary market, making them an attractive option for portfolio diversification and risk management.
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Collateral for Financial Transactions
Treasury Bills are often used as collateral in interbank lending and borrowing, including repo transactions. Their risk-free nature and high marketability make them ideal for securing short-term loans between banks and other financial institutions. They are also accepted as collateral by clearing corporations, exchanges, and regulators in various market segments. This enhances trust and reduces counterparty risk. T-Bills serve as a benchmark for pricing other short-term debt instruments and play a foundational role in India’s money market infrastructure and credit risk mitigation mechanisms.
Challenges of Treasury Bills (T-Bills):
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Limited Returns
One of the major challenges with T-Bills is their low yield, as they are designed to be low-risk instruments. While suitable for conservative investors, the returns are often lower than other short-term investments like corporate bonds or fixed deposits. In periods of low interest rates, T-Bills may offer negligible real returns after accounting for inflation. This makes them less attractive for retail investors seeking higher income or wealth growth. Hence, T-Bills are more suitable for institutional investors focused on capital preservation over returns.
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Limited Retail Participation
Despite their safety and simplicity, retail participation in T-Bills remains low in India. Many individual investors are unaware of T-Bills or lack access to the required platforms like RBI Retail Direct. Furthermore, the discount-based structure and lack of regular interest payments may confuse new investors. The perception that T-Bills are meant only for banks or large institutions also discourages broader adoption. To expand the investor base, there is a need for greater awareness, simplified processes, and enhanced digital infrastructure for retail access.
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Market Liquidity Constraints
While T-Bills are generally liquid, liquidity can be limited in the secondary market, especially for certain maturities or during economic uncertainty. Investors seeking to sell T-Bills before maturity may not always find buyers at favorable prices. This challenge can affect short-term portfolio adjustments, especially for institutions managing large funds. Low trading volumes can also cause price volatility, reducing their effectiveness as a risk-free benchmark. Strengthening the secondary market through better participation and market-making mechanisms is essential for addressing this issue.
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Interest Rate Risk for Investors
Although T-Bills have short maturities, interest rate fluctuations can still impact their attractiveness and pricing in the secondary market. If market interest rates rise after purchase, existing T-Bills—locked at lower discount rates—become less desirable, potentially leading to capital loss upon early sale. This affects institutions that rely on short-term trading of T-Bills for profit. Additionally, reinvestment risk arises when T-Bills mature during low interest rate periods, forcing investors to reinvest at unattractive rates, especially if market timing and strategy aren’t well-aligned.
