Money Market Instruments and Treasury bills

The instruments traded in the Indian money market are

1. Treasury bills (T-bills)
2. Call/notice money market – Call (overnight) and short notice (up to 14 days)
3. Commercial paper (CP)
4. Certificates of deposit (CD)
5. Commercial bills (CD)

Call/notice market and treasury bills form the most important segments of the Indian money market. Treasury bills, call money market, and certificates of deposit provide liquidity for government and banks while commercial paper and commercial bills provide liquidity for the commercial sector and intermediaries.

Treasury bills are short term instruments issued by the Reserve Bank on behalf of the government to tide over short term liquidity shortfalls. This instrument is used by the government to raise short term funds to bridge seasonal or temporary gaps between its receipts (revenue and capital) and expenditure. They form the most important segment of the money market not only in India but all over the world as well.

T-bills are repaid at par on maturity. The differences between the amount paid by the tenderer at the time of purchase (which is less than the face value) and the amount received on maturity represents the interest amount on T-bills and is known as the discount. Tax deducted at source (TDS) is not applicable on T-bills.

Features of T-Bills:

1. They are negotiable securities.
2. They are highly liquid as they are of shorter tenure and there is possibility of inter-bank repos in them.
3. There is absence of default risk.
4. They have an assured yield, low transaction cost, and are eligible for inclusion in the securities for SLR purposes.
5. They are issued in scrip form. The purchases and sales are effected through the Subsidiary General Ledger (SGL) account.
6. At present, there are 91 day and 364-day T-bills in vogue. The 91-day T-bills are auctioned by RBI every Friday and the 364-day T-bills every alternate Wednesday that is, the Wednesday preceding the reporting Friday.
7. Treasury bills are available for a minimum amount of Rs 25,000 and in multiples thereof.

Types of T-bills:

There are three categories of T-bills:

On tap bills: On-tap bills as the name suggests, could be bought from the Reserve bank at any time at an interest yield of 4.663 percent. They were discontinued from April1, 1997, as they had lost much of their relevance.

Ad hoc bills: Ad hoc bills were introduced in 1955. It was decided between the Reserve Bank and the Government of India that the government could maintain with the Reserve bank a cash balance of not less than Rs 50 crore on Fridays and Rs 4 crore on other days, free of obligations to pay interest there on, and whenever the balance fell below the minimum the government account would be replenished by the creation of ad hoc bills of favor of the Reserve bank. Ad hoc 91-day T-bills were created to replenish the government’s cash balances with Reserve Bank. They were just an accounting measure in the Reserve Bank’s books and, in effect, resulted in automatic monetization of the government’s budget deficit. A monetized deficit is the increase in the net Reserve Bank credit to the central government which is the sum of the increases in the Reserve Bank’s holdings of: (1) the government of India’s dated securities; (2) 91-day treasury bills; and (3) rupee coins for changes in cash balances with the Reserve Bank.

In the 1970s and 1980s, a large proportion of outstanding ad hoc were converted into long term dated and updated securities of the government of India. This conversion is referred as funding. Their expansion put a constraint on the Reserve bank conduct of monetary policy and hence they were discontinued from April1, 1997. The outstanding ad hoc T-bills and tap bills as on March 31 1997 were funded on April, 1997, into special securities without any specified maturity at an interest rate of 4.6 percent per annum. A system of Ways and Means Advances from April 1, 1997, was introduced to replace ad hoc bills to accommodate temporary mismatches in the government of India receipts and payments.

Auctioned T-bills: The most active money market instruments were first introduced in April 1002. The Reserve Bank receives bids in an auction from various participants and issues the bills subject to some cut-off limits. Thus, the yield of this instrument is market determined. These bills are neither rated nor can they be rediscounted with the Reserve Bank. At present, the Reserve Bank issues T-bills of two maturities 91-days and 364 days.