Introduction
In a significant departure for Q4 of the fiscal year 2023-24, the Government of India at the Centre has made proposals to raise ₹3.94 lakh crore through Treasury Bills (T-Bills) in the January–March 2024 period. This represents a substantial improvement over the ₹2.47 lakh crore borrowed in October–December 2023, based on the Reserve Bank of India’s auction calendar.
This action has profound effects on the financial system, particularly in the management of liquidity, market conditions, and investment for different stakeholders, such as retail investors, banks, and financial institutions.
What Are Government Securities (G-Secs)?
Government Securities (G-Secs) are tradable debt instruments issued by the Central or State Governments to finance fiscal deficits. They are widely considered as safe investment options due to the sovereign guarantee and are often used by institutions for regulatory and liquidity management purposes.
Types of G-Secs:
| Type | Description | Maturity |
|---|---|---|
| T-Bills (Treasury Bills) | Short-term instruments | 91, 182, or 364 days |
| Dated Securities or Bonds | Long-term instruments | 1 year and above |
- Central Government issues both T-Bills and dated bonds.
- State Governments issue only bonds, known as State Development Loans (SDLs).
- Risk Profile: These are referred to as gilt-edged securities, implying virtually zero default risk.
What are the Rules Under Which RBI Transfers its Surplus to the Government?
- The RBI transfers its surplus to the government in accordance with Section 47 (Allocation of Surplus Profits) of the Reserve Bank of India Act, 1934.
- A technical committee of the RBI Board headed by Y H Malegam (2013), which reviewed the adequacy of reserves and surplus distribution policy, recommended a higher transfer to the government.
- According to this section, after making provisions for reserves and retained earnings, the RBI transfers the surplus to the government.
- The amount transferred is determined based on various factors, including the RBI’s income from sources such as interest on holdings of domestic and foreign securities, fees and commissions from its services, profits from foreign exchange transactions, and returns from subsidiaries and associates.
- On the expenditure side, the RBI incurs costs such as printing of currency notes, payment of interest on deposits and borrowings, salaries and pensions of staff, operational expenses of offices and branches, as well as provisions for contingencies and depreciation.
Government’s borrowing plan for the first half of FY 2025-26 – PIB
About Treasury Bills (T-Bills)
Treasury Bills (T-Bills) are zero-coupon securities issued by the Government of India. These are short-term debt instruments used primarily to meet temporary mismatches in government receipts and expenditures.
Key Characteristics:
- Zero-Coupon Security: Issued at a discount and redeemed at face value.
- First Introduced: In 1917 in India.
- Maturities: 91-day, 182-day, and 364-day durations.
Usage and Purpose:
- Used by the government to raise short-term capital.
- Banks purchase T-Bills to fulfill their Statutory Liquidity Ratio (SLR) requirements.
- Serve as collateral for repo operations with the RBI.
Who Can Invest?
- Individuals
- Banks
- Financial institutions
- Mutual funds
- Trusts
What Is a Zero-Coupon Security?
A zero-coupon security does not offer periodic interest payments (called coupons). Instead, it is issued at a discount and redeemed at full face value on maturity.
Example:
If a 91-day T-bill has a face value of ₹100, it might be issued at ₹96.50. Upon maturity, the investor receives ₹100, thus earning ₹3.50 in profit.
Role in Financial Markets
T-Bills serve as a vital tool in India’s monetary policy operations. The RBI uses them for:
Open Market Operations (OMOs):
- To Inject Liquidity: RBI buys T-Bills/G-Secs.
- To Absorb Liquidity: RBI sells T-Bills/G-Secs.
- This helps in stabilizing inflation and maintaining the desired liquidity levels in the economy.
Auction Mechanisms:
- Conducted by the RBI on behalf of the Government.
- Auction results impact short-term interest rates, especially in tight liquidity conditions.
Advantages and Disadvantages of Treasury Bills
| Advantages | Disadvantages |
|---|---|
| Safety and Security: Government-backed, making them risk-free. | Liquidity Tightness: High borrowing signals tight liquidity. |
| Highly Liquid: Easily traded in secondary markets. | Market Sensitivity: Heavy issuance can raise short-term rates. |
| Short-Term Horizon: Suitable for short-term goals like emergency funds. | Low Returns: Compared to corporate bonds or equity. |
| Diversification: Reduces portfolio risk. | Investor Concentration: Mostly held by institutional investors, low retail participation. |
Emerging Trends & New Developments
Retail Participation Push
- Launch of RBI Retail Direct and NSE goBID to simplify access
- Increased transparency and digitalization expected to widen reach
Digitalization of G-Sec Market
- Real-time tracking of yields
- Integrated platforms for participation via mobile apps and UPI-based payments
Inclusion in Global Bond Indexes
- India’s G-Secs (including T-Bills) likely to be included in global bond indices like JP Morgan GBI-EM
- May drive FPI inflows into Indian debt market
T-Bill ETFs and Mutual Funds
- AMCs are launching short-term G-Sec funds or T-Bill ETFs to channel retail money into safer government instruments
Way Forward
As the government ramps up its borrowing via T-Bills, it is essential to ensure balanced growth and participation across all investor classes. Here’s what can be done:
1. Promote Retail Participation
- Launch awareness campaigns to educate retail investors about the safety and liquidity of T-Bills.
- Promote easy access through platforms like NSE goBID, RBI Retail Direct, and stock exchanges.
2. Efficient Liquidity Management
- Streamline Open Market Operations (OMOs) for optimal money supply.
- Ensure timely intervention to curb excessive volatility in interest rates.
3. Policy Flexibility
- RBI must retain the ability to adjust auction sizes and timings based on prevailing market conditions.
- This ensures resilience in debt financing strategies.
4. Ensure Market Stability
- Continuously monitor the impact of T-Bill issuance on liquidity and short-term interest rates.
- Use data-driven strategies to maintain equilibrium.
Conclusion
The rise in Treasury Bill borrowing indicates the government’s quick reaction to changing fiscal and liquidity requirements. Although this introduces short-run supply pressures, it also provides secure and flexible investment opportunities to different stakeholders. With the appropriate policy mix and strong auction frameworks, the RBI and the government can guarantee effective liquidity management, market stability, and financial inclusion.
