Common Money Market Instruments Treasury Bills

Posted on 15-04-2016        By ADMIN

CommonMoney Market Instruments are as follows:

Treasury Bills (T-Bills)

Treasury Bills, one of the safest money market instruments, are short termborrowing instruments of the Central Government of the Country issued throughthe Central Bank (RBI in India).

They are zero risk instruments, and hence the returns are not so attractive.

It is available both in primary market as well as secondary market.

It is a promise to pay a said sum after a specified period.

T-bills are short-term securities that mature in one year or less from theirissue date.

They are issued with three-month, six-month and one-year maturity periods. 

TheCentral Government issues T- Bills at a price less than their face value (parvalue).

They are issued with a promise to pay full face value on maturity.
So, when the T-Bills mature, the government pays the holder its face value.

The difference between the purchase price and the maturity value is theinterest income earned by the purchaser of the instrument.

T-Bills are issued through a bidding process at auctions.

The bid can be prepared either competitively or non-competitively.

In the second type of bidding, return required is not specified and the onedetermined at the auction is received on maturity.

Whereas, in case of competitive bidding, the return required on maturity isspecified in the bid.

In case the return specified is too high then the T-Bill might not be issued tothe bidder.

At present, the Government of India issues three types of treasury billsthrough auctions, namely, 91-day, 182-day and 364-day.

There are no treasury bills issued by State Governments.

Treasury bills are available for a minimum amount of Rs.25K and in itsmultiples.

While 91-day T-bills are auctioned every week on Wednesdays, 182-day and364-day T-bills are auctioned every alternate week on Wednesdays.

The Reserve Bank of India issues a quarterly calendar of T-bill auctions whichis available at the Banks’ website.

It also announces the exact dates of auction, the amount to be auctioned andpayment dates by issuing press releases prior to every auction.

Payment by allottees at the auction is required to be made by debit to their/custodian’s current account.

T-bills auctions are held on the Negotiated Dealing System (NDS) and themembers electronically submit their bids on the system.

NDS is an electronic platform for facilitating dealing in Government Securitiesand Money Market Instruments.

RBI issues these instruments to absorb liquidity from the market by contractingthe money supply.

In banking terms, this is called Reverse Repurchase (Reverse Repo).

On the other hand, when RBI purchases back these instruments at a specifieddate mentioned at the time of transaction, liquidity is infused in the market.This is called Repo (Repurchase) transaction.

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