In this article, we’re going to explore Treasury Bills and talk about what they are, types of Treasury Bills, how to calculate your return as an investor in these bills, and how they work to give you the return you get.
What are Treasury Bills?
Indian T-bills function as short-term IOUs issued by the government. The government borrows money from investors by selling these bills at a discount to their face value.
Treasury bills are almost never high-reward instruments because they’re very low risk – seeing as they have the faith and the credit of the Indian government behind them. United States Treasury Bills are considered by investors around the world as “risk-free”, setting the benchmark for all other fixed income instruments.
Key terms in Treasury Bill investing
Here’s a breakdown of the key terms you need to know to start investing in T-Bills:
- Maturity: T-bills in India are available in three tenors: 91 days, 182 days, and 364 days, catering to a range of short-term investment needs.
- Liquidity: Although not as actively traded as other instruments like stocks or commodities, T-bills can be bought and sold in the secondary market before their maturity too. This usually offers some liquidity to investors who don’t want to hold the bills to maturity to realise the returns, offering some liquidity to both buyers and sellers.
- Return and coupons: T-bills do not pay regular interest in the form of coupon payments. The return comes from the discount on the purchase price.
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Calculating returns on T-bill investments
As an investor, you hold the T-bill until its maturity date, at which point you receive the full face value. The difference between the purchase price and the redemption value represents the investor’s return. You could also sell these bills in the secondary market to lock-in gains from interest rate fluctuations.
For instance, the government might issue a hypothetical ₹1,000 face value bill to you, the investor, at a discount – say ₹800. Let’s suppose that this bill matures in 91 days. When it does mature, the bill that you bought a year ago for ₹800 returns to you the face value, which is ₹1,000. Effectively, you make a 25% return on your investment in one year.
Note: The example above is for explanatory purposes only. T-bills usually offer much lower interest rates in the range of 6.9% – 7.1% depending on the maturity.
T-Bills are investment instruments designed for the short-term, which means that they’re more of a money market investment than a capital appreciation instrument like bonds.
Types of T-Bills in India
Here are the major types of T-Bills categorised by maturity:
- 91-day T-bill: These bills are usually auctioned on Wednesday, and the payment is made on the following Friday. They are auctioned every week. These bills are sold in multiples of ₹25,000.
- 182-day T-bill: The issue and payment of these bills is similar to the 91-day bill. The minimum amount for investment is ₹25,000.
- 364-day T-bill: The same terms are applicable to this bill as well. The only difference is that these bills mature in 364 days. They are also issued on Wednesdays and can be bought in multiples of ₹25,000 only.
Frequently Asked Questions
What is the difference between an Indian T-Bill and a government bond?
T-Bills are short-term instruments with maturities of 91 days, 182 days, and 364 days. Government bonds are long-term instruments with maturities ranging from 1 year to 40 years. Consequently, T-Bills are good instruments to park surplus funds in, and realise a small yet guaranteed return. Investors flock to bonds usually seeking capital appreciation and regular interest income.
Can NRIs invest in Indian T-bills in foreign currency?
No, NRIs (Non-Resident Indians) cannot invest in Indian T-bills using foreign currency. They need to have a bank account in India denominated in rupees (INR) to participate in T-bill auctions.
What are the risks of investing in T-bills besides inflation?
If interest rates rise after you purchase a T-bill, the return you earn might be lower than what you could have gotten with other investments. This however doesn’t apply when you hold the bill till maturity. The return at maturity is guaranteed. The only unrealised loss here is the decline in value for the bill in the secondary market.
How do T-bills affect the Indian economy?
T-bills play an important role in managing the government’s short-term money needs. By issuing T-bills, the government can borrow money to fund its expenditures without resorting to printing more currency, which can lead to inflation. Additionally, T-bill auctions help signal the government’s borrowing costs and influence overall interest rates in the economy, which drives several other macroeconomic inputs.
How does the credit rating of the Indian government impact T-bills?
Popular credit ratings agencies rate Indian government bonds at BBB-, Baa3, and BBB-. This means that the rating for the Indian government is right above “junk.” However, unlike corporate bonds, the credit risk associated with T-bills is considered to be minimal. This is because they are backed by the sovereign guarantee of the Indian government. However, a further downgrade in India’s credit rating could impact investor confidence and lead to lower demand for T-bills in foreign markets.
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