TREASURY BILLS MARKET

TB is a kind of a promissory note put out by the government of a country. It is

only the central govt. that sells TB in India after 1950.

Qualities of TBs:

High liquidityAbsence of risk of

default ready availability on

tapAssured yieldLow transaction costNegligible capital

depreciation

Two types of TBs have been in vogue in India-o Ordinaryo Adhoc (1937- Ist. April 1997)o A system of Ways and Means (WAM)

introduced on Ist. April 1997, to accommodate mismatch between GOI receipts and payments.

System of Marketing

• TBs are issued by tender or on tap. Until 1965, they were sold to the public by tender or at weekly auctions.

• With effect on 12th July 1965, they were available on tap throughout the week at rates announced from time to time.

• This change in the procedure of selling TBs facilitates investment in them by commercial banks as an when their resources increased.

• Banks’ participation in TBS is much more significant in India than those of UK and US.

Limitations of TBM in India

• Only RBI ( whereas banks and discount houses deals in TBM in UK)

• Low rate of return on investment.

• Investing in GSM is without risk and a relatively higher return, FIs are also required to invest in GSM.

• Banks in India are required to invest in GSM for maintaining their SLR, this has reduced the importance of TBM as an investment medium.

Chakravarty and Vagul Committee

• The major suggestion made by them was to deregulate and revise the TBs rate upwards.

• Since then the fixed rate of discount of 4.6% on of 91 –day TBs was replaced by the system of flexible interest rate.

• From 1993 the TB rate became market determined.

182-Day TBM

• To widen the money market, a 182 day TB was introduced in November 1986.

• This bill could be purchased by any person in India but unlike 91 day TBs, they were not purchased by state govts. and for provident funds.

• The 182 day TBs ceased to be issued from October 1992. the bill thus had a short life span of about 6 years.

364-Day TBM

• Introduced in 1992.• The return on this particular bill is quite high

compare to other bills.• Features are similar with that of 182 day TBs.

14- Day TBM

• Intermediate TB introduced on Ist April 1997 and 20th May 1997.

• Sold only to state govts., foreign central banks and other specified bodies to invest their temporary cash surpluses (in place of 91-day).

• It can be renewed on the expiry of the 14 days from the date of issue.

• The discount rate is set at quarterly intervals.• The state govts and other investors who used

to receive a 4.6% fixed rate can now receive a market determined interest.

• Disadvantage: Not tradeable or transferable.

RECENT DEVELOPMENTS IN TBM

• THE RBI ISSUED ONLY 91-DAY AND 364 DAY TBs.

• 364-DAY IS MUCH BIGGER NOW THAN THE 91-DAY TBM.

• THE 364-DAY TBs ACCOUNT FOR THE MAJOR PROPORTION OF THE OUTSTANDING TBs.