Treasury Bills - Government of India

**Treasury Bills** Treasury bills are [money market instruments](https://groww.in/p/money-market-instruments/) issued by the Government of India as a promissory note with guaranteed repayment at a later date. Funds collected through such tools are typically used to meet short term requirements of t...

**Treasury Bills** Treasury bills are [money market instruments](https://groww.in/p/money-market-instruments/) issued by the Government of India as a promissory note with guaranteed repayment at a later date. Funds collected through such tools are typically used to meet short term requirements of the government, hence, to reduce the overall fiscal deficit of a country. They are primarily short-term borrowing tools, having a maximum tenure of 364 days, available at zero coupons (interest) rate. They are issued at a discount to the published nominal value of government security (G-sec). Government treasury bills can be procured by individuals at a discount to the face value of the security and are redeemed at their nominal value, thereby allowing investors to pocket the difference. For example, a 91-day treasury bill with a face value of Rs. 120 can be bought at a discounted price of Rs. 118.40. Upon maturity, individuals are eligible to receive the entire nominal value of Rs. 120, which allows them to realise a profit of Rs. 1.60. Now, take a look at other important treasury bill details. Why Does the Government Issue Treasury Bills? A short term treasury bill helps the government raise funds to meet its current obligations, which are in excess of its annual revenue generation. Its issue is aimed at reducing total fiscal deficit in an economy, and also in regulating the total currency in circulation at any given point of time. The Reserve Bank of India (RBI) also issues such treasury bills under its open market operations (OMO) strategy to regulate its inflation level and spending/borrowing habits of individuals. During times of economic boom leading to high and persistent inflation rates in the country, high-value treasury bills are issued to the public, which, thereby, reduces aggregate money supply in an economy. It effectively curbs the surging demand rates, and in turn, high prices hurting the poorer sections of the society. Alternatively, a contractionary OMO regime is undertaken by the RBI during times of recession and economic slowdown through a reduction in treasury bill circulation and reduced discounted value of the respective bonds. It disincentives individuals into channelling their resources in this sector, thereby boosting cash flows to the [stock markets](https://groww.in/stocks) instead, ensuring a boost in the productivity of most companies. Such a rise in productivity has a positive impact on the [GDP](https://groww.in/p/gross-domestic-product-gdp/) and aggregate demand levels in an economy. Hence, a treasury bill is an integral monetary tool used by the RBI to regulate the total money supply in an economy, along with its fundraising usage. Types of Treasury Bill  The distinction between different treasury bill types is made based on their tenure, as enumerated below: - 14-day treasury bill - 91-day treasury bill - 182-day treasury bill - 364-day treasury bill While the holding period remains constant for all types of treasury bills issued (as per the categories mentioned above), face values and discount rates of such bonds change periodically, depending upon the funding requirements and monetary policy of the RBI, along with total bids placed. Features of Government Treasury Bills - Risk-free Treasury bills are one of the most popular short-term government schemes issued by the RBI and are backed by the central government. Such tools act as a liability to the Indian government as they need to be repaid within the stipulated date. Hence, individuals enjoy comprehensive security on the total funds invested as they are backed by the highest authority in the country, and have to be paid even during an economic crisis. - Liquidity As stated above, a government treasury bill is issued as a short-term fundraising tool for the government and has the highest maturity period of 364 days. Individuals looking to generate short term gains through secure investments can choose to park their funds in such securities. Also, such G-secs can be resold in the secondary market, thereby allowing individuals to convert their holding into cash during emergencies. - Non-competitive bidding Treasury bills are auctioned by the RBI every week through non-competitive bidding, thereby allowing retail and small-scale investors to partake in such bids without having to quote the yield rate or price. It increases the exposure of amateur investors to the government securities market, thereby creating higher cash flows to the capital market. - Minimum investment  As per the regulations put forward by the RBI, a minimum of Rs. 25,000 has to be invested by individuals willing to procure a short term treasury bill. Furthermore, any higher investment has to be made in multiples of Rs. 25,000. - Zero-coupon securities G-Sec treasury bills don't yield any interest on total deposits. Instead, investors stand to realise [capital gains](https://groww.in/p/capital-gains/) from such investments, as such securities are sold at a discounted rate in the market. Upon redemption, the entire par value of this bond is paid to investors, thereby allowing them to realise substantial profits on total investment. - Fixed Returns: The government and the RBI determine fixed rates for treasury bills. These rates will remain unchanged throughout the investment period. This stability is an attractive option if you seek fixed returns. - Price Discovery: Price discovery involves determining the bill's market value based on supply and demand dynamics, and factors like economic conditions, interest rates, and investor sentiment influence the market-set prices. **Limitations of Treasury Bills** - Low Returns: Despite being backed by the RBI and offering guaranteed returns, Treasury bills yield relatively modest returns. Compared to other investment options, the returns alone may not meet your financial goals. -  Taxation: Returns from treasury bills are subject to [Short-Term Capital Gains (STCG) tax](https://www.adityabirlacapital.com/abc-of-money/what-are-tax-benefits-on-short-term-capital-gains). They will be taxed at your applicable slab rate and can reduce the effective returns on your investment. - Affected by Inflation: Your returns on treasury bills are susceptible to inflation. If the rate of return is lower than the inflation rate, the real value of the returns diminishes, reducing your purchasing power. -  Expensive: T-bills have a minimum investment requirement of ₹25,000 or ₹1 lakh. This may be difficult for small investors. Features of Commercial Paper Commercial paper possesses several distinct features that make it a popular choice for short-term financing, particularly in commercial paper in India. These features are designed to meet the immediate funding needs of corporations while offering attractive opportunities for investors: 1. **Unsecured Nature:** - Commercial paper is typically unsecured, meaning it is not backed by [collateral](https://www.religareonline.com/knowledge-centre/share-trading/what-is-collateral/). This characteristic relies heavily on the issuer's creditworthiness and reputation. - Issuers with high credit ratings can issue commercial paper without backing assets, making the process quicker and less cumbersome. 2. **Short-Term Maturity:** - Maturities range from a few days to a year, with most papers maturing within 270 days. This short-term nature makes it an ideal instrument for managing immediate financing needs. - The quick turnover of these instruments aligns well with the short-term liquidity requirements of both issuers and investors. 3. **Issued at a Discount:** - Commercial paper is sold at a discount to its [face value](https://www.religareonline.com/knowledge-centre/share-market/face-value/). The difference between the purchase price and the face value represents the investor's return. - This structure simplifies the interest payment process, as the return is realised at maturity when the face value is paid. 4. **High Denomination:** - Generally issued in large denominations, often exceeding Rs. 1 crore, it is suitable primarily for institutional investors rather than retail investors. - Minimum Amount is Rs. 5 lakh and multipleof - The large denominations help companies raise substantial amounts of capital efficiently. 5. **Flexible Use of Proceeds:** - Funds raised through commercial paper can be used for various short-term needs, including working capital, inventory financing, and other operational expenses. - This flexibility allows companies to address immediate financial requirements without impacting their long-term financing plans. 6. **Liquidity:** - High liquidity due to short maturities and active [secondary markets](https://www.religareonline.com/knowledge-centre/share-market/what-is-secondary-market/). Commercial paper can be easily bought and sold before maturity, giving investors flexibility. - The liquid nature of these instruments makes them an attractive investment for entities looking to manage their cash flows dynamically. 7. **Credit Rating:** - Issuers often obtain credit ratings for their commercial paper from recognised rating agencies. High credit ratings enhance investor confidence and reduce borrowing costs. - Investors rely on these ratings to assess the risk associated with the commercial paper, making it easier to make informed investment decisions. **Certificate of Deposit** A Certificate of Deposit or CD is a fixed-income financial tool that is governed by the Reserve Bank of India and is issued in a dematerialized form. It is a type of agreement made between the depositors and the banks, wherein the bank pays an interest on your investment.  Certificate of Deposit is a short-term investment that comes with fixed investment amounts and maturity tenure ranging between 1-3 years. Given below are some of the important features of CDs and the method to buy a certificate of deposit. Features of Certificate of Deposit  Here are some salient features of CDs and how they compare to other financial instruments. - Certificate of deposit in India can be issued for a minimum deposit of Rs. 1 lakh or in subsequent multiples of it. - Certificates of deposit are issued by the Scheduled Commercial Banks (SCBs) and All-India Financial Institutions. The Cooperative Banks and the Regional Rural Banks(RRBs) are not eligible for issuing a CD. - There is a term period of 3 months to 1 year for CDs that are issued by SCBs, whereas the term period ranges from 1 year to 3 years for CDs issued by financial institutions.  - CDs in dematerialised forms can be transferred through endorsement or delivery, similar to dematerialised securities. - There is no lock-in period for a certificate of deposit. - It is fully taxable under the Income Tax Act. **Repo rate** is a crucial monetary policy tool used by central banks to regulate the money supply and interest rates in an economy. It\'s the rate at which a central bank lends money to commercial banks against government securities.   **Key Features of Repo Rate:** 1. **Monetary Policy Tool:** The repo rate is a primary instrument for central banks to control inflation and stimulate economic growth. By adjusting this rate, they can influence the cost of borrowing for banks, which, in turn, affects lending rates to consumers and businesses.   2. **Short-Term Lending:** Repo loans are typically short-term in nature, often overnight or for a few days.   3. **Government Securities as Collateral:** Commercial banks pledge government securities as collateral when borrowing from the central bank at the repo rate.   4. **Impact on Interest Rates:** When the repo rate is lowered, banks can borrow money at a cheaper rate, which encourages them to lend more to consumers and businesses. This can stimulate economic activity but may also lead to higher inflation. Conversely, when the repo rate is raised, it becomes more expensive for banks to borrow, discouraging lending and potentially curbing inflation.   5. **Liquidity Management:** The repo rate also plays a role in managing liquidity in the banking system. If banks have excess liquidity, they may choose to deposit it with the central bank at the reverse repo rate (which is typically lower than the repo rate).   6. **Benchmark Rate:** The repo rate often serves as a benchmark for other interest rates in the economy, such as those on loans and deposits.   **Reverse repo rate** is another monetary policy tool used by central banks. It\'s the rate at which commercial banks lend money to the central bank. **Key Features of Reverse Repo Rate:** 1. **Liquidity Management:** The primary function of the reverse repo rate is to manage liquidity in the banking system. When banks have excess funds, they can deposit them with the central bank at this rate. 2. **Interest Earnings:** Banks earn interest on their deposits with the central bank at the reverse repo rate. 3. **Counterbalance to Repo Rate:** The reverse repo rate acts as a counterbalance to the repo rate. When the central bank wants to absorb excess liquidity from the system, it can raise the reverse repo rate, making it more attractive for banks to deposit their funds with the central bank. 4. **Impact on Money Supply:** By influencing the amount of liquidity in the banking system, the reverse repo rate can indirectly affect the money supply. 5. **Correlation with Repo Rate:** The reverse repo rate is typically lower than the repo rate. This ensures that banks are incentivized to lend to the central bank rather than to other banks at a lower rate. Commercial bill  ---------------- Commercial bills are also called "bills of exchange," which are used by firms for financing their working capital. In addition, it is used as a short-term negotiable and self-liquidating tool for funding credit sales.  Commercial bills are used when the selling of goods takes place on credit. This makes the buyer liable for paying the amount on a particular date and time. Here, the seller has two options: they can wait for the specific future date or use exchange bills to acquire a credit amount.  The seller generally draws the commercial bills on the purchaser for goods value. The maturity of the bill can range from 30, 60, and 90 days. Then, if the seller requires funds, they draw a bill sent for acceptance to the buyer.   The buyer then accepts the bill with a promise to pay the amount on the specified date. In many cases, the seller might also produce the bill in the bank. The financial institution will charge a specific commission with a promise to pay if the buyer fails.  If the seller decides to draw a commercial bill and the purchaser accepts the same, the bill becomes marketable. This bill is further known as a trade bill. Before the bill's maturity date, it can be discounted in the bank by the seller. Accepting a trade bill at any commercial bank is called a commercial bill.  Like commercial paper, the bill also provides various benefits to the business. It is a strong and important channel that helps to provide short-term finance to small and medium-sized businesses. The commercial bill validates the cash credit scheme under bank lending. The large corporate sectors do not accept or use commercial bills as payment modes.  **Call Money** Call money is also known as ***Money at Call***. It is, in fact, a very short-term loan meant to address issues that arise in banks and [financial institutions](https://www.shiksha.com/online-courses/articles/financial-institutions-types-roles-and-advantages/) regarding their everyday liquidity requirements. It is also operated overnight or for a few days without any collateral. The interest rates for call money loans can fluctuate daily, influenced by the market\'s demand and supply of funds. **Advantages of Call Money** **Flexibility:** Call money is flexible for managing liquidity day to day. Financial institutions or organizations borrowing or lending call money do it for the shortest possible time, sometimes overnight. This liquidity allows them to change their cash positions according to their immediate requirements. **Efficiency in Liquidity Management:** It allows banks to manage their reserve requirements efficiently. With this facility, a bank may lend or borrow from the call money market, which will ensure they meet their regulatory liquidity requirements without having to maintain excess reserves that would draw poor returns. **Cost-Effective:** Borrowing through the call money market could be cheaper than other means of obtaining short-term funding. However, it\'s important to note that, being mostly unsecured and for very short tenure, the rate of interest on call money is very low compared to other borrowings. This low interest rate may not always compensate for the potential risks involved. **No Collateral Required: **In the call money market transaction, collateral is not required. This eases the borrowing process and helps minimize the transaction cost, giving an advantage to well-established institutions with a good credit rating. **Supports Monetary Policy: **The call money market is of very great use for the conduct of monetary policy by the central bank. In fact, through manipulation, the central bank can indirectly impact the liquidity preference of the public and can influence the short-term money rates in the direction it likes. **Stability of Markets: **The call money market\'s presence helps maintain stability in the whole financial system. This assists institutions in absorbing unexpected liquidity shocks and reduces the related risk of default for failing to meet credit obligations by borrowers.  **Regulation in the Money Market** The money market, a vital component of the financial system, is subject to a complex regulatory framework designed to ensure its stability, efficiency, and fairness. This framework varies across different jurisdictions, but some common regulatory themes include: **1. Central Bank Oversight:** - **Interest Rate Policy:** Central banks often regulate interest rates in the money market to influence monetary policy, control inflation, and stimulate economic growth. - **Reserve Requirements:** Central banks may mandate that financial institutions maintain a certain percentage of their deposits as reserves, affecting the amount of money available for lending. - **Open Market Operations:** Central banks can buy or sell government securities in the open market to influence the money supply and interest rates.   **2. Securities Regulations:** - **Issuance and Trading:** Regulations often govern the issuance, trading, and settlement of money market instruments like Treasury bills, commercial paper, and certificates of deposit. - **Disclosure Requirements:** Issuers of money market securities may be required to provide detailed information about their financial condition and risk factors. **3. Financial Institution Regulation:** - **Capital Adequacy:** Financial institutions operating in the money market must maintain sufficient capital to absorb losses and protect depositors. - **Liquidity Requirements:** Institutions may be subject to liquidity requirements to ensure they have enough cash or liquid assets to meet their obligations. - **Risk Management:** Regulations often mandate that financial institutions implement effective risk management practices to mitigate potential risks. **4. Market Conduct:** - **Fair Trading:** Regulations may prohibit market manipulation, insider trading, and other forms of misconduct. - **Consumer Protection:** Regulations may protect investors from unfair or deceptive practices. **5. Systemic Risk:** - **Stress Testing:** Regulators may require financial institutions to conduct stress tests to assess their resilience to adverse economic conditions. - **Resolution Frameworks:** Regulators may develop frameworks for resolving failing financial institutions in a way that minimizes systemic risk. **Key Regulatory Bodies:** - **Central Banks:** The Federal Reserve (US), the European Central Bank (EU), the Bank of England (UK), and the Reserve Bank of India (India) are examples of central banks that play a significant role in regulating the money market. - **Securities Regulators:** The Securities and Exchange Commission (SEC) in the US, the Financial Conduct Authority (FCA) in the UK, and the Securities and Exchange Board of India (SEBI) are examples of securities regulators that oversee the money market. **UNIT IV** **Capital Market** **Meaning of Capital market:** Capital markets are financial markets for the buying and selling of long-term debt or long term securities having a maturity-period (age) of one year or more. These markets channel/direct the wealth of savers to those who can put it to long-term productive/useful use, such as companies or governments making long-term investments/capital spending. Financial regulators/watchdogs such as the Securities and Exchange Board of India (SEBI), oversee/direct the capital markets in their jurisdictions/areas to protect investors against fraud/dishonesty among other duties **Importance or Functions of Capital Market:** The capital market plays an important role in mobilizing saving and channel them into productive investments for the development of commerce and industry. As such, the capital market helps in capital formation and economic growth of the country. We discuss below the importance of capital market. 1\. Link between savers and investors: The capital market acts as an important link between savers and investors. The savers are lenders of funds while investors are borrowers of funds. The savers who do not spend all their income are called "Surplus units" and the investors/borrowers are known as "deficit units". The capital market is the transmission mechanism between surplus units and deficit units. It is a conduit through which surplus units lend their surplus funds to deficit units. 2\. Basis for industrialization: Capital market generates long term funds, which are essential for the establishment of industries. Thus, capital market acts as a basis for industrialization. 3\. Accelerating the pace of growth: Easy and smooth availability of funds for medium and long period encourages the entrepreneurs to take profitable ventures/ businesses in the field of trade, industry, commerce and even agriculture. It results in the all round economic growth and accelerates the pace of economic development. 4. Generating liquidity: Liquidity means convertibility into cash. Shares of the public companies are transferable i.e., in case of financial requirements these shares can be sold in the stock market and the cash can be obtained. This is how capital market generates liquidity. 5\. Increase the national income: Funds flow into the capital market from individuals and financial intermediaries which are absorbed by commerce, industry and government. It thus facilitates the movement of stream of capital to be used more productively and profitability to increase the national income. 6\. Capital formation: The capital market prides incentives to savers in the form of interest or dividend to transfer their surplus fund into the deficit units who will invest it in different businesses. The transfer of funds by the surplus units to the deficit units leads to capital formation. 7\. Productive investment: The capital market provides a mechanism for those who have savings transfer their savings to those who need funds for productive investments. It diverts resources from wasteful and unproductive channels such as gold, jewelry, conspicuous consumption, etc. to productive investments. 8\. Stabilization of the value of securities: A well-developed capital market comprising expert banking and non-banking intermediaries brings stability in the value of stocks and securities. It does so by providing capital to the needy at reasonable interest rates and helps in minimizing speculative activities. 9\. Encourages economic growth: The capital market encourages economic growth. The various institutions which operate in the capital market give quantities and qualitative direction to the flow of funds and bring rational allocation of resources. They do so by converting financial assets into productive physical assets. This leads to the development of commerce and industry through the private and public sector, thereby encouraging/inducing economic growth. Structure Of Capital Market The capital market is a complex system that facilitates the long-term financing of businesses and governments. It consists of various interconnected components that work together to allocate capital efficiently. Here is a breakdown of the primary structures and participants: **Primary Market:** - **Issuers:** Companies, governments, and other entities that issue securities to raise capital. - **Investors:** Individuals, institutions, and other entities that purchase newly issued securities. - **Underwriters:** Investment banks that facilitate the issuance of securities by helping to price them, distribute them, and manage risk. **Secondary Market:** - **Exchanges:** Organized platforms where securities are bought and sold, such as the New York Stock Exchange, the Nasdaq, and the Bombay Stock Exchange. - **Over-the-Counter (OTC) Markets:** Decentralized networks where securities are traded directly between buyers and sellers, often through brokers and dealers. - **Brokers and Dealers:** Intermediaries that facilitate the buying and selling of securities in the secondary market. **Financial Intermediaries:** - **Investment Banks:** Financial institutions that provide a wide range of services, including underwriting, mergers and acquisitions, and investment research. - **Commercial Banks:** Banks that provide a variety of financial services, including loans, deposits, and investment products. - **Mutual Funds:** Investment pools that collect money from investors and invest in a diversified portfolio of securities. - **Pension Funds:** Pools of money that are set aside to provide retirement benefits. - **Insurance Companies:** Companies that sell insurance policies to protect individuals and businesses from financial losses. **Regulatory Framework:** - **Securities Regulators:** Government agencies that oversee the capital market to ensure fair and efficient operations. - **Central Banks:** Central banks that regulate the money supply and interest rates, which can affect the capital market. **What are the instruments traded in the Capital Market?** 1. **Equities:** Equity securities refer to the part of ownership that is held by shareholders in a company. In simple words, it refers to an investment in the company's equity stock for becoming a shareholder of the organization. The main difference between equity holders and debt holders is that the former does not get regular payment, but they can profit from capital gains by selling the stocks. Also, the equity holders get ownership rights and they become one of the owners of the company. When the company faces bankruptcy, then the equity holders can only share the residual interest that remains after debt holders have been paid. Companies also regularly give dividends to their shareholders as a part of earned profits coming from their core business operations. 2. **Debt Securities:** [Debt Securities](https://www.elearnmarkets.com/school/units/debt-markets-1) can be classified into bonds and debentures: 1. **Bonds:** Bonds are fixed-income instruments that are primarily issued by the centre and state governments, municipalities, and even companies for financing infrastructural development or other types of projects. It can be referred to as a loaning capital market instrument, where the issuer of the bond is known as the borrower. [Bonds](https://blog.elearnmarkets.com/7-types-of-bonds-that-you-can-invest-in/) generally carry a fixed lock-in period. Thus, the bond issuers have to repay the principal amount on the maturity date to the bondholders. 2. **Debentures:** Debentures are unsecured investment options unlike bonds and they are not backed by any collateral. The lending is based on mutual trust and, herein, investors act as potential creditors of an issuing institution or company. 3. **Derivatives:** [**Derivative**](https://www.elearnmarkets.com/courses/display/derivative-analytics) instruments are capital market financial instruments whose values are determined from the underlying assets, such as currency, bonds, stocks, and stock indexes. The four most common types of [derivative](https://blog.elearnmarkets.com/understanding-derivative-market/) instruments are forwards, futures, options and interest rate swaps: - **Forward: **A forward is a contract between two parties in which the exchange occurs at the end of the contract at a particular price. - **Future: **A future is a derivative transaction that involves the exchange of derivatives on a determined future date at a predetermined price. - **Options: **An option is an agreement between two parties in which the buyer has the right to purchase or sell a particular number of derivatives at a particular price for a particular period of time**.** - **Interest Rate Swap**: An interest rate swap is an agreement between two parties which involves the swapping of interest rates where both parties agree to pay each other interest rates on their loans in different currencies, options, and swaps. #### **4. **Exchange-Traded Funds: [Exchange-traded funds](https://blog.elearnmarkets.com/what-are-exchange-traded-funds-etfs/) are a pool of the financial resources of many investors which are used to buy different capital market instruments such as shares, debt securities such as bonds and derivatives. Most ETFs are registered with the [**Securities and Exchange Board of India**](https://blog.elearnmarkets.com/sebi-purpose-objective-functions-sebi/) (SEBI) which makes it an appealing option for investors with a limited expert having limited knowledge of the stock market. ETFs having features of both shares as well as mutual funds are generally traded in the stock market in the form of shares produced through blocks.  ETF funds are listed on stock exchanges and can be bought and sold as per requirement during the equity trading time. 5. Mutual Fund A mutual fund is a collection of money from multiple investors that is used to buy a variety of securities, such as stocks and bonds. Professional money managers, known as asset management companies (AMCs), run the fund and decide when to buy and sell securities.