What are Treasury Bills?

Treasury Bills Market

Treasury bill is a monetary policy instrument through which government raise funds for short period requirements and commercial banks invest their short period surpluses by buying these bills from government.

Three types of treasury bills are important:

91 days Treasury bill;
182 days Treasury bill; and
364 days Treasury bills.
It may be noted that 91 day Treasury bill is a traditional instrument. During 1980’s and 1990’s the other two treasury bills were introduced. 182 days Treasury bill was introduced by auction for financing fiscal-deficit for the short period. Introduction of 364 day Treasury bills discontinued the use of 182 day Treasury bill.

Types

Treasury bills are of two types:

ad hoc and
regular.
The ad hoc treasury bills were used to support the borrowing programme of the government. The ad hoc treasury bills are not marketable because they are not sold o the public or banks. In the past, the bulk of the Treasury bill issue was of ad hoc 91 day bills. The treasury bills sold to the public or banks are regular treasury bills. These are marketable.

All treasury bills are bought and sold at a discounted value. The amount of interest due on the bills is paid in the form of discount at the time of purchase. The discounted price is obviously lower than the face value.

In industrially developed countries, treasury bills are one of the important forms of holding short-term surplus funds by the financial institutions and firms because they are highly liquid and offer a risk-free reasonable rate of return. The government raises a large amount of funds through treasury bills. But in India, the RBI is the main holder of treasury bills. The financial institutions and firms are not active buyers in the Treasury bill market because of the low rate of discount on treasury bills. The RBI was made a captive buyer of ad hoc treasury bills. This has been responsible for the conversion of government debt into Reserve Money. As a result, money supply was growing more rapidly than the growth in money demand. The system of ad hoc treasury bills was discontinued from the year 1997-98.