Treasury Bills (T-Bills): A Key Short-Term Government Instrument

Context:

India has extended its financial support to the Maldives by rolling over a $50 million Treasury Bill, continuing a practice that began in 2019. The move comes amid the island nation’s struggle with high public debt, a widening fiscal deficit, and billion-dollar debt servicing commitments in 2025 and 2026.

Currency Swap Support

• In 2023, the Reserve Bank of India (RBI) provided a $400 million USD swap and ₹30 billion INR swap to ease a financial crunch in the Maldives.
• These facilities helped maintain foreign exchange liquidity and avert balance-of-payment pressures.

Treasury Bills (T-Bills): A Key Short-Term Government Instrument

What are Treasury Bills?

• Treasury Bills (T-Bills) are short-term money market instruments issued by the Government of India.
• They serve as promissory notes with guaranteed repayment on maturity.
• T-Bills are issued at a discount to face value and carry no coupon (zero interest rate).

Purpose of Issuance:

• To meet short-term funding requirements of the central government.
• To bridge fiscal deficits and manage temporary cash flow mismatches.
• Utilized by RBI under Open Market Operations (OMO) to regulate money supply and inflation.

Key Features:

• Zero-Coupon Security: Issued at a discount, redeemed at face value.
• Tenure: Maximum maturity of 364 days.
• Risk-Free Instrument: Backed by the Government of India; highly secure.
• Tradability: Actively traded in the secondary market.
• High Liquidity: Suitable for short-term investment and fund parking.

How Investors Benefit:

• Profit arises from the difference between issue price and face value.
  • Example: A 91-day T-Bill with a face value of ₹120 may be bought at ₹118.40. On maturity, the investor receives ₹120, making a profit of ₹1.60.

Monetary Policy Tool – RBI’s Use of T-Bills:

• During Inflation (Boom Periods):
  • RBI issues more T-Bills to absorb excess liquidity.
  • Helps curb inflationary pressures by reducing money supply and demand.
• During Recession (Slowdown Periods):
  • RBI reduces issuance or lowers discounts to discourage T-Bill investments.
  • Encourages liquidity to move to stock markets and productive sectors, enhancing GDP and employment.

Types of Treasury Bills in India (Based on Tenure):

1. 91-day T-Bill – Most frequently traded; short-term liquidity solution.
2. 182-day T-Bill – Medium-duration T-Bill for moderate-term investments.
3. 364-day T-Bill – Longest tenure under T-Bills; used by institutional investors for near one-year parking of funds.

Who Can Invest?

• Individuals
• Banks
• Corporates
• Mutual Funds
• Insurance Companies
• Foreign Portfolio Investors (FPIs)

Advantages of Treasury Bills (T-Bills)

1. Government-Backed Security:
   • T-Bills are backed by the Government of India, offering high credit safety and zero default risk.
   • Even during economic crises, repayment is assured, making them ideal for risk-averse investors.
2. Short-Term Investment with Predictable Returns:
   • T-Bills offer fixed returns over short durations (up to 364 days).
   • Suitable for individuals seeking secure, short-term capital appreciation.
3. High Liquidity and Tradability:
   • Treasury bills can be easily sold in the secondary market, offering liquidity in emergencies.
   • Investors can convert holdings into cash before maturity.
4. Access for Small Investors:
   • Retail investors can participate through non-competitive bidding in weekly RBI auctions.
   • No need to quote yield or price, promoting financial inclusion and market exposure for new investors.
5. No TDS on Redemption:
   • No tax deducted at source (TDS) at maturity.
   • Beneficial for those in non-taxable income brackets, as there’s no need to claim TDS refunds.

Limitations of Treasury Bills:

1. Low Returns Compared to Market Instruments:
   • As zero-coupon securities, T-Bills offer fixed and relatively lower returns than stocks or mutual funds.
   • Returns remain unaffected by favorable economic conditions or market upswings.
2. Limited Capital Growth:
   • The return potential is capped, unlike equity instruments that may yield exponential gains during bull runs.
3. Interest Rate Risk (for Secondary Market Investors):
   • If sold before maturity, T-Bill prices may fluctuate with interest rate movements, potentially affecting gains.

Taxation of Treasury Bills:

• Short-Term Capital Gains (STCG):
  • Gains from T-Bills are considered STCG, taxed as per the investor’s income tax slab.
  • Applies if the investor sells before maturity or redeems within one year.
• No TDS Deduction:
  • No TDS is deducted at source, reducing compliance burden.
  • Investors in lower tax brackets avoid unnecessary deductions and refund claims.