Treasury bills

Indian Economy glossary

Also called: T-bills · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT

Meaning

Treasury bills (T-bills) are short-term loans taken by the Government of India. They come in three tenors (tenor means how long the loan lasts): 91, 182 and 364 days. They pay no interest coupon. Instead, they are sold below face value and repaid at full face value on maturity.

They matter for two reasons. They carry zero default risk, so the T-bill yield is the risk-free short-term rate that other money-market rates are measured against. They are also one of the main tools the Centre uses to borrow for short periods.

Discount yield formula: Yield (%) = [(Face value − Price) ÷ Price] × (365 ÷ Days to maturity) × 100

Explanation

How a T-bill works

  • Money market instrument. A T-bill lasts less than one year, so it belongs to the money market (the market where people borrow and lend for up to one year).
  • Discount instrument. It pays no interest coupon (no regular interest payment).
  • The investor buys it below face value (face value is the amount paid back on maturity).
  • The government repays the full face value on maturity.

  • The gap between the two amounts is the investor's return.

  • Who borrows, who runs the sale

  • The borrower is the Government of India.

  • The RBI auctions the bills on behalf of the Centre, because the RBI is the government's debt manager.

  • Three tenors: 91 days, 182 days and 364 days.

Worked example (91-day T-bill)

  • Face value = ₹100. Auction price = ₹98.50. Gain = ₹1.50.

  • Yield = (1.50 ÷ 98.50) × (365 ÷ 91) × 100 = 0.01523 × 4.011 × 100 ≈ 6.11% a year.

  • Now suppose the auction price falls to ₹98.30. Gain = ₹1.70.

  • Yield ≈ 6.94% a year.

  • Lesson: a lower price means a higher yield.

What makes T-bill prices and yields rise or fall

  • Price and yield move in opposite directions (Class 12, Money and Banking).
  • The amount paid on maturity (face value) is fixed.

  • So a buyer who wants a higher return must pay a lower price today.

  • Interest rates rise → T-bill prices fall → yields rise

  • The RBI raises the repo rate (the rate at which the RBI lends to banks for a short time).
  • Overnight money-market rates go up.

  • Buyers now want a higher return from T-bills, so they bid lower prices at the auction.

  • Liquidity in the banking system

  • When banks have plenty of spare cash, they bid for more T-bills. Prices rise and yields fall.
  • When cash is short, fewer banks bid. Prices fall and yields rise.

In India

  • Issuer: the Government of India (the Centre). The Centre is the borrower.
  • Auctioneer: the RBI, acting as the government's debt manager. It does not borrow through T-bills itself.
  • SLR link: banks hold T-bills to meet the SLR (Statutory Liquidity Ratio: the share of deposits that banks must keep in safe, liquid assets such as government securities).
  • Cash Management Bills (CMBs): these are a special kind of T-bill with a tenor of less than 91 days, in use since 2009.
  • They cover the Centre's temporary cash gaps. For example, salaries may fall due before advance-tax money comes in.

  • Like T-bills, they are issued at a discount and repaid at face value.

  • Role in monetary policy transmission (how an RBI rate change reaches the wider economy):

  • RBI changes the repo rate → call and TREPS rates move → T-bill, CP and CD yields follow → bank loan and deposit rates change.

  • NCERT error to remember: Class 12, Money and Banking says the bonds and T-bills that banks hold as reserves are "issued by the RBI". This is wrong. They are Government of India securities. The RBI only runs the auction.

Don't confuse with

  • Cash Management Bills (CMBs): also government discount bills, but with a tenor of under 91 days (since 2009). Regular T-bills are fixed at 91, 182 or 364 days.
  • Commercial Paper (CP): also a discount instrument, but the issuers are companies, NBFCs and others, not the government. CP is unsecured and needs a credit rating of at least 'A3' [1]. T-bills carry zero default risk.
  • Certificate of Deposit (CD): issued by banks to raise bulk deposits. A CD may also carry a fixed or floating rate [2]. T-bills are issued only for the Centre and never pay a coupon.
  • Dated government securities (G-secs / bonds): these are also central government debt, but they last more than one year and usually pay a coupon. So they belong to the capital market, while T-bills belong to the money market.

Prelims Hooks

  • T-bill tenors are 91, 182 and 364 days. They pay no coupon. They are issued at a discount and repaid at face value.
  • The issuer is the Government of India. The RBI only runs the auction as debt manager. Trap: NCERT Class 12 wrongly says "issued by the RBI".
  • CMBs are T-bills of less than 91 days, in use since 2009, used to cover the Centre's temporary cash gaps.
  • Yield = [(Face value − Price) ÷ Price] × (365 ÷ Days) × 100. A lower auction price means a higher yield.
  • The T-bill yield is the risk-free short-term rate, because the Centre does not default.
  • Banks hold T-bills to meet their SLR requirement.

Mains Points

  • T-bills and monetary policy transmission (GS-III)
  • T-bill yields respond quickly to RBI repo rate changes and to liquidity in the banking system.
  • Because the T-bill yield is the risk-free benchmark, CP and CD rates, and later loan and deposit rates, are priced above it.

  • A deep and liquid T-bill market therefore helps RBI rate decisions reach the economy faster, which supports inflation targeting.

  • Short-term borrowing as a cash-management tool (GS-III, public finance)

  • T-bills and CMBs (since 2009) let the Centre cover gaps between spending and tax receipts without disturbing long-term borrowing plans.

  • Trade-off: heavy dependence on short-term bills means the debt must be rolled over often (repaid by new borrowing), so the government's borrowing cost is more exposed to sudden rate rises.

  • Captive demand through the SLR

  • Banks must hold government securities, including T-bills, to meet the SLR. This gives the Centre a steady group of buyers.
  • The debate: it keeps government borrowing cheap and safe. But money locked in SLR assets is money banks cannot lend to businesses and households.

Related concepts

Read more

Sources

  1. 1Master Direction – Reserve Bank of India (Commercial Paper and Non-Convertible Debentures) Directions, 2024rbi.org.in · tier 1
  2. 2Master Direction – Reserve Bank of India (Certificate of Deposit) Directions, 2021rbi.org.in · tier 1