Treasury Bills (T-Bills) - Notes on Reserve Bank of India

1. They are short term liability of central Government, and not issued by state governments. 2. They are instruments issued at a discount to the face value and redeemed at the face value at maturity. The return to the investors is the difference between the maturity value or the face value (that is ₹100) and the issue price. 3. ==Being risk-free, their yields at varied maturities serve as short term benchmarks and help pricing varied floating rate products in the market.== 4. They are issued to help govt. with temporary mismatches between revenue and expenditure. 5. **Ad-hoc T-bills to finance deficit:** 1. It was announced in the First Five Year Plan though its quantum was to be limited to the extent it was non-inflationary. 2. They were first introduced in the 1950s 3. January 1955 - It was mutually agreed between Central Government and RBI that a minimum cash balance of Rs.50 crore on Fridays and Rs.4 crore on other days would be held by the Central Government. So there was no fixed schedule for their issuance. 4. So whenever the balances fell below these levels, the Reserve Bank would replenish the government's cash balances by creation of ad hoc Treasury Bills (mostly 91-day T-bills) in *favour of the Reserve Bank.* So they were not sold through any tender or auction. 5. In other words, the budgetary deficit were automatically monetised through the issuance of ad hoc treasury bills, in the times of rising debt and inflation till 1997. 6. They were non-marketable and ==meant to be temporary (a short-term finance), but gained a permanent as well as a cumulative character.== 6. **Ordinary T-bills: 1. These were marketable (available to the market, that is to banks, retail investors and RBI for purchase) 91-day t-bills, which were sold by weekly auctions, that is issued at market rates based on a weekly schedule of borrowing. In other words, they were issued to the RBI and others. 2. After July 12, 1965, T-bills were sold on a "tap" basis, that is available (whenever demanded) for the whole week, at a fixed rate of discount, which varied with bank rate. However, In July 1974, RBI fixed the treasury bill (ad-hocs and 91-day tap treasury bills) rate at 4.6%. Thus the auctions were discontinued, which were introduced in 1917. 3. They were mainly taken up by banks, (and state governments, foreign banks, quasi govt. institutions, and others), to invest their surpluses for short-term or to comply with the requirements of maintaining the Statutory Liquidity Ratio (SLR). 4. But the main advantage for the the buyers were that these on-tap T-bills were rediscounted by the RBI. So the RBI would end up holding them along with the ad hoc T-bills. 5. As mentioned above, since July 1974, this discount rate remain fixed at 4.6 %, which was also less than half of the prevailing market rates. This was done to contain the interest cost of the rising debt. But when the average inflation stood around 8.0 per cent, these T-bills yield negative real interest rates. 6. The fixed rate and limited market for T-bills outside RBI made these bills ineffective as an monetary instrument to manage liquidity with flexible rates. ## Issues with ad hocs 1. [Dr Rangarajan](https://www.rbi.org.in/commonman/english/history/Scripts/Governors.aspx#Dr.C%20Rangarajan:~:text=21%2D11%2D1997-,Dr.%20C%20Rangarajan,-was%20a%20professional) brought out the ill-effects of ad hocs in his Presidential Address at the Annual Conference of the Indian Economic Association in December, 1988. 1. The scale of Government borrowing was maintained at a high level and surpluses on revenue account turned into deficits. *A revenue account surplus in the Indian budget occurs when the government's revenue receipts (like tax revenue) are greater than its revenue expenditure* 2. Borrowing has been at less than market rates. 3. Even the growing captive investors in Government securities such as commercial banks were not willing to subscribe beyond their statutory obligations. 4. RBI as a manager of public debt became the residual subscriber. 5. Since Government incurred deficits year after year, the question of retirement of Treasury Bills did not arise. 6. The expansionary impact (rise in base money) of monetisation of these deficits, after taking into account the movements in net foreign exchange assets (increase in money supply due to purchase of foreign exchange), had to be countered. So two problems here. 7. To counter the impact, open market operations were not possible given the interest rate structure 1. As most of these bills were held by RBI (due to rediscounting and ad-hoc purchases) leading to market outside RBI being absent and the discount rate being fixed (from 1974), ==these treasury bills did not help as a monetary tool for short-term liquidity management with flexible rates through OMOs. 2. It is also **important to have mechanisms for open market operations** or market based instruments to help with surges in flows of foreign capital as we move along the path of capital account liberalisation. That is difficult under a system of ad hocs but is possible when auctioned Treasury Bills and dated securities take the place of ad hocs. 8. Cash Reserve Ratio had to be increased at regular intervals with an aim to absorb the excess liquidity. 1. The ad hoc bills were created automatically and without a limit. This along with re-discounting of on-tap bills contributed to rapid monetary expansion, that is an increase in the [[Reserve Money|reserve money]] or printing of more money, when the budget deficit became very large. As output response was inhibited by structural issues, this financing of deficit was adding to inflation. Hence CRR had to be hike. 2. Even SLR was raised periodically to support high borrowings. 3. So as much as 50% of banking system's liabilities was preempted through hike in CRR and SLR to primarily [[#^d38353|finance]] the budget deficits of the governments. 4. It had [[#^58b98b|limited]] other options. Bank Rate had limited scope due to administered interest rate regime and open market operations was also could not help much because of the narrowness of the govt. securities market. 2. Both of the above system of bills led to decline of auction system and the market for 91-day treasury bills. 3. It also did not allow creation of a market-determined interest rates. 4. Even the overnight call and notice money rates had upper limits. The deposit and lending rates of banks were, for most part, administered. >[!normal] > 1. The Committee to [Review the Working of the Monetary System (Chairman - Prof. Sukhamoy Chakravarty, 1985)](RBI_Group:Committee_19850410_Report%20of%20the%20Committee%20to%20Review%20the%20Working%20of%20the%20Monetary%20System_Chairman-Sukhamoy%20Chakravarty.pdf.pdf), set up by the RBI, suggested reducing the monetary expansion through the process of monetisation of fiscal deficit, through an agreement between the Reserve Bank and the Government. > 2. This reform proposal was also put forth in [[RBI_Speech_19930917_Autonomy of Central banks - Tenth M.G Kutty Memorial Lecture_C. Rangarajan.pdf|1993 M. G. Kutty Memorial Lecture on "Autonomy of Central Banks" by C. Rangarajan]], but it took 4 years after this to implement it simply because the government had grown accustomed to it and it was not possible to suddenly discontinue it. [^1] > 3. On **Feb 28, 1994**, in his [budget speech](GoI_Budget%20Speech_1994_Budget%201994-95%20Speech%20of%20Manmohan%20Singh.pdf), Manmohan Singh announced the limits for access to ad-hoc T-bills by Govt. > 4. The First Supplemental Agreement between the RBI and the Government of India was signed on **September 9, 1994** setting out a system of limits for creation of ad hoc treasury bills during the three-year period ending 1996-97. > 5. In 1997, soon after Dr. Y.V. Reddy moved to the RBI, the second agreement with the government was signed, where Mr. Montek Singh Ahluwalia represented the government. > 6. In pursuance of this Second Supplemental Agreement between the RBI and the Government of India on March 6, 1997, the ad hoc and on-tap Treasury bills (both carried fixed discount rate of 4.6% since July 1974) were completely phased out from April 1, 1997 > 7. The system of issuance of ad hoc treasury bills was finally replaced from April, 1997 with the Ways and Means Advances [[Ways and Means (WMA)|(WMAs)]], to accommodate temporary mismatches in Government receipts and payments. > 8. But overdrafts above Ways and Means were permissible beyond ten continuous working days, though at a cost. > 9. From April 1999, a full-fledged system of Ways and Means Advances became operative. ^3a183a 5. With this, the process of the elimination of ad hoc Treasury bills was executed in the above three stages 6. It ended the automatic monetization of budget deficit, and hence allowed RBI to control supply of money and thereby the conduct of monetary policy with more freedom, effectiveness and implement fiscal discipline as the central govt. now had to rely on market borrowing to finance the fiscal deficit 7. Here one of the aspects of fiscal policy reforms was to reduce the fiscal deficit. However cut in tariff rates as part of liberalisation of foreign trade was one of the reasons the govt. could not reduce the deficit as quickly they were expected to. 8. But several years later, that is in 2003, [[OPEN FRBM Act, 2003 - The Fiscal Responsibility and Budget Management Act|FRBM Act]] was enacted as an agreement between RBI and govt. over the appropriate levels of fiscal deficit, which was 3% of the GDP. 1. However, the fiscal deficit rose more than this level every year (even in years of high growth) other than one year. 2. The penalty has been only an explanation to the parliament, and a higher cost of borrowing from the market (as automatic monetisation ceased after April 1, 1997). 1. Fiscal Responsibility Bill - The Sarma committee set up in 2000 with the then Secretary, Economic Affairs, Dr. E.A.S. Sarma as the Chairman and Dr. Ashok Lahiri as one of the members; and a working group comprising of RBI officials [[Treasury Bills (T-Bills)#^d38353|was set up]] under the Chairmanship of Dr. Y.V. Reddy to provide technical assistance to the main Committee on several aspects for drafting the [Fiscal Responsibility Bill]((https://www.indiabudget.gov.in/budget_archive/es2000-01/chap26.pdf). 2. The name of the Bill was changed to Fiscal Responsibility and Budget Management Bill, as the RBI advised the Government that without incorporating transparent budget management rules and medium term fiscal framework, the objective of fiscal responsibility would not be achieved. 3. [FRBM Bill, 2000]((https://eparlib.sansad.in/bitstream/123456789/64321/1/13_Finance_18.pdf) 4. [FRBM, Act 2003](https://dea.gov.in/files/budget_division_documents/FRBM_Act_2003_and_FRBM_Rules_2004.pdf) 9. With the enactment of the FRBM Act, 2003, RBI was also prohibited from subscribing to primary issues of Central Government securities after March 31, 2006. 1. <span style="background-color:#ffffcc;">Thus with the end of the practice of automatic debt monetisation through the issuances of ad hoc T-Bills to RBI in 1997 and the end of RBI’s participation in the primary market for government debt in 2006, the yields on government bonds became truly market determined. These 2 events also changed the how RBI and govt coordinated on management of public debt. </span> 10. This started an era of development of the debt market. 1. The funding, that is conversion of ad-hoc treasury bills into long-term dated securities began in July 1958. 2. Before 1982, these funded securities had specific maturity dates and varying rates. 3. After 1982, they carried fixed interest of 4.6% p.a, were undated (no specific redemption dates), and non-marketable, making them difficult to sell them to the public. They were thus perpetual public debt held by the RBI at rates far below market levels. 4. By end-March 1994, RBI held funded, non-marketable securities worth ₹71,000 crore on its books. 5. By end-March 1997, in addition to the above, ad hoc Treasury Bills outstanding (held by RBI) amounted to ₹1,21,818 crore, which were funded into undated (long-term with no maturity date) special securities carrying 4.6% interest per annum. 6. In other words, this stock was in fact public debt in perpetuity, held by the RBI, bearing a discount rate of 4.6 per cent though the market rates were far higher. 7. Subsequently, in coordination with the government, dated securities were issued as part of the conversion of these special securities into marketable securities, carrying market-related coupon rates. This process was completed by 2003–04, in phases, depending on market conditions and the need for open market operations (OMO) by the RBI. ^1d4d71 8. This enhanced the RBI’s interest income, since the new dated securities carried coupon rates in line with prevailing secondary market rate for matching maturity. 9. ==Disagreements between Finance Ministry and RBI over interest rates== 1. With interest rates on govt. borrowing determined by the market, there were tensions between the two, from 1992 to until 2015-16 when multiple indicator approach regime ended and new FIT framework for monetary policy was adopted followed by setting up of [[Monetary Policy Decisions in the RBI - The Structure|MPC]], over the interest rates. This is because the it impacts the govt. the most as the largest borrower in the market. 2. Here the govt. is more worried *about how high the rise can go and its impact*, and would be less happy about fall in rates when the borrowings fell, which though did not happen even in times of high rates. 11. Along with ad hocs, even on-tap treasury bills were phased out after April 1997. 12. T-bills of different shorter maturities were introduced. ## Timeline 1. Till 1986, only 91-day bill, issued on tap; at a fixed rate of 4.5% (the rates on these bills remained unchanged at 4.5% since 1974) was available for investment. 2. 182-day T-bill (with this auction process for T-bills started) was introduced in [[Treasury Bills (T-Bills)#^8f4f68|November 1986]]. 1. These bills were sold monthly up to June 1988 and fortnightly from July 1988 until April 1992. 3. April 1988 - Discount and Finance House of India (DFHI) was set up by RBI to provide liquidity to money market instruments. 1. SBI DFHI was created out of the merger of two Primary Dealers — the RBI promoted Discount & Finance House of India (DFHI) and SBI Gilts Limited (subsidiary of SBI). 4. 364-day T-bill were introduced on April 28, 1992, and issued through a fortnightly auction auction. They replaced the 182-day T-bill 5. 91-day T-bill auction started on [[Treasury Bills (T-Bills)#^a0786f|January 8, 1993]]. 6. 14-day T-Bills 1. April 1, 1997 - In order to provide State Governments, foreign central banks and special bodies with an alternative arrangement in place of 91-day tap Treasury Bills for investment of their temporary cash surpluses, effective April 1, 1997. the Government of India introduced the Scheme of 14-day Intermediate Treasury Bill 2. On June 6 1997, after discontinuation of ad-hoc/on-tap 91-day T-bills, the first auction of 14-day T-bill was conducted. 3. These bills also allowed state government, foreign central banks, financial institutions to invest surplus cash for a short period. 4. The yield was same as that on [[Ways and Means (WMA)|WMAs]]. 7. October 1997 - auction of 28-day T-bill was introduced. 8. 1998 - 8-day T-bill were announced. But, they have been discontinued now. 9. **Discontinued:** 14 and 182 days Treasury Bills was [discontinued](RBI_Press%20Release_20010512_RBI%20effects%20changes%20in%20Treasury%20Bill%20Auctions.pdf) from May 14, 2001 (Monetary and Credit Policy for 2001-2002). 10. April 6, 2005 - the 182-day T-bills were re-introduced on an auction basis. 11. **As of now, 91-day, 182-day and 364-day T-Bills are auctioned.** 12. Yield on T-bill is calculated as per [this formula](https://www.rbi.org.in/commonman/English/Scripts/FAQs.aspx?Id=711#26:~:text=It%20is%20calculated%20as%20per%20the%20following%20formula) *(since October 27, 2004, 1 year is 365 days and not 364)* 13. May 12, 2010 - [Cash Management Bills (CMBs)](G-Secs-Primary%20Market.md#^f52884), a new short-term instrument with characteristics identical to T-bills but with maturities of less than 91 days to address temporary government cash flow mismatches. 14. Aug 13, 2012- [Report](RBI_Group-Committee_20120813_Report%20of%20the%20Working%20Group%20on%20Enhancing%20Liquidity%20in%20the%20Government%20Securities%20and%20Interest%20Rate%20Derivatives%20Markets.pdf) of the Working Group on Enhancing Liquidity in the Government Securities and Interest Rate Derivatives Markets was published. 15. [April 07, 2014](RBI_Notification_20140723_Foreign%20investment%20in%20India%20by%20SEBI%20registered%20Long%20term%20investors%20in%20Government%20dated%20Securities.pdf) - RBI prohibited Foreign Portfolio Investors (FPIs) from investing in short-term government debt, including Treasury Bills, to curb volatile "hot money" outflows and encourage long-term foreign investment. 16. [April 27, 2018](RBI_Notification_20180427_Investment%20by%20Foreign%20Portfolio%20Investors%20(FPI)%20in%20Debt%20-%20Review.pdf) - Revised foreign investment norms, allowing FPIs to invest in Treasury Bills once again, subject to a macro-prudential cap where their short-term investments (under 1 year) cannot exceed 20% of their total central government bond portfolio. 17. [April 25, 2019](RBI_Notification_20190425_Investment%20by%20Foreign%20Portfolio%20Investors%20(FPI)%20in%20Debt%20-%20Review.pdf) - RBI allowed FPIs to invest in municipal bonds, within the limits set for FPI investment in State Development Loans (SDLs). >==[Chronology](https://rbi.org.in/Scripts/PublicationsView.aspx?id=9483#:~:text=Table%207.2%3A%20Treasury%20Bills%20%E2%80%93%20Chronology%20of%0ADevelopments)of Developments in treasury bills in "Manual on Financial and Banking Statistics - March 2007". == 18. **Primary Market (Bids & Auctions):** 13. [[G-Secs-Primary Market#^776078|Link]] 19. **Secondary Market** 1. [[G-Secs-Secondary Market|Link]] ## Data Releases 1. [Link](G-Secs-Primary%20Market.md#Data%20Releases) ## Related Notes 1. [[G-Secs-Primary Market]] 2. [[G-Secs-Secondary Market]] ## References: 1. C. Rangarajan. (1993) _Autonomy of Central Banks_, Tenth _M. G. Kutty Memorial Lecture_ at. Calcutta, September 17, 1993 - [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=1169) | [[RBI_Speech_19930917_Autonomy of Central banks - Tenth M.G Kutty Memorial Lecture_C. Rangarajan.pdf|pdf]] 2. RBI. (Nov, 1996). [Page 4 of RBI Bulletin -Nov 1996](https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/11NOV19968D9CA7D8358543B7843A4BD90E06594B.PDF) ^8f4f68 3. RBI. (Nov, 1996). [Page 6 of RBI Bulletin -Nov 1996](https://rbidocs.rbi.org.in/rdocs/Bulletin/PDFs/11NOV19968D9CA7D8358543B7843A4BD90E06594B.PDF) ^a0786f 4. RBI. (Mar 8, 1997). Budget and RBI : New Directions. by Dr. Y.V. Reddy. Address By Dr. Y.V. Reddy Deputy Governor Reserve Bank of India at Administrative Staff College of India, Hyderabad on March 8, 1997. [Link](https://rbi.org.in/Scripts/BS_SpeechesView.aspx?Id=227) 5. Y.V. Reddy. (June 19, 2008). *==Fiscal Policy and Economic Reforms==.* Address by Dr. Y.V. Reddy, Governor, Reserve Bank of India at the National Institute of Public Finance and Policy (NIPFP) on May 26, 2008 (edited transcript)). [Link](https://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=393) ^d38353 6. GoI. [General Notification](https://rbidocs.rbi.org.in/rdocs/content/pdfs/GOI27032018_A.pdf) for sale of Government of India Treasury Bills/Cash Management Bills by Auction - March 28, 2018 7. GoI. [General Notification](https://rbidocs.rbi.org.in/rdocs/content/pdfs/GOI26032025.pdf) for sale of Government of India Treasury Bills/Cash Management Bills by Auction - March 26, 2025 8. Narendra Jadhav, Partha Ray, Dhritidyuti Bose and Indranil Sen Gupta. ==The Reserve Bank of India’s Balance Sheet: Analytics and Dynamics of Evolution.== Reserve Bank of India Occasional Papers Vol. 24, No. 3, Winter 2003. [Link](https://www.rbi.org.in/upload/publications/pdfs/60611.pdf) ^58b98b 9. RBI. [[About the RBI#^c00c02|History]]: The Reserve Bank of India-[Volume 2](https://www.rbi.org.in/scripts/RHvol-2.aspx)-1951–1967 10. RBI. A Brief History of Public Debt in India. [Link](https://rbi.org.in/scripts/functional.aspx) 11. Shruti Rajagopalan. _Fiscal Responsibility and Budget Management Bill, 2000_. Centre for Civil Society. [Link](https://ccs.in/sites/default/files/2022-10/Fiscal%20Responsibility%20and%20Budget%20](https://ccs.in/sites/default/files/2022-10/Fiscal%20Responsibility%20and%20Budget%20Management%20Bill%202000.pdf) 12. More references can be found [[G-Secs-Primary Market#References|here]] [^1]: Shruti Rajagopalan. (2023, April 13). _Chakravarthi Rangarajan on monetary policy after liberalization_ [Interview]. Mercatus Center. [Link](https://www.mercatus.org/ideasofindia/chakravarthi-rangarajan-monetary-policy-after-liberalization)