Whenever there’s fear of a global crisis or recession, large global investors such as mutual funds, pension funds and others move their money from riskier assets such as stocks, into safe haven ones such as US treasuries. While global investors may prefer US treasuries, Indian investors may like to park their money closer home - in T-bills or treasury bills.

What are they?

To fill the gap between its expenditure and income (the fiscal deficit), the Government of India borrows a prodigious amount of money from the public each year. It does so by issuing bonds for periods ranging from 91 days to 40 years. These bonds auctioned off throughout the year by the Reserve Bank of India (RBI). When the Government issues bonds for longer terms they are called dated g-secs (government securities).

Bonds for periods of upto a year are called treasury bills or T-bills. Earlier, only banks, insurance companies, pension funds et al could buy T-bills and g-secs from RBI auctions (with the money you invested!). Last year, the government decided to allow retail investors to directly bid in RBI auctions. If you’re a regular investor in bank deposits, NBFC deposits, small savings schemes or overnight/liquid funds, T-bills now offer a good alternative to all of these.

The Indian government issues T-bills with three maturity periods – 91 days, 182 days and 364 days. T-bills carry a fixed interest rate. But unlike FDs or bonds, this interest is not paid out. Instead, T-bills are issued at a discount to their face value and redeemed at par, so that the difference makes up your effective yield. If a 91-day T-bill with a face value of ₹100 is issued at ₹98.5, its effective yield (return to you) is 6.1 per cent per annum (discount/face value * 365/91 *100).

How to bid?

To buy T-bills in RBI auctions, you need to open a Retail Direct Gilt (RDG) account with RBI. You need to link the RDG account to your bank account and need to pay the entire bid amount upfront. Allotment for retail investors is assured, unless the issue itself is withdrawn or cancelled.

Once you open an account, you will receive email notifications of upcoming auctions from the RBI RDG support team every week. Auctions of T-bills usually start on Fridays and conclude on the Wednesday of the following week. When placing your bid, the platform gives you information on the tenure of the T-bill (91 day, 182 day or 364 day), the maturity date, the size of the issue and bid start and end dates. It also provides an indicative yield based on prevailing market prices of gilts. However, competitive bidding by institutions in the auction may set a slightly different price for a g-sec or T-bill than RBI expects. You will be allotted securities based on this final cutoff yield with any excess amount refunded to you. Retail investors can invest in T-bills in multiples of ₹10,000 going up to ₹2 crore. But only one bid is permitted from an account in every auction.

Cash in on dynamic rates

Though T-bills like g-secs are traded in the NDS OM platform, secondary market liquidity in the Odd Lots segment where retail investors trade, can be patchy. Therefore, it is best for you to plan to hold your T-bills to maturity. You should match the tenure of the T-bill you’re investing in, to your liquidity requirements.

Unlike bank deposit rates or rates on small savings schemes, yields on T-bills are dynamic and highly sensitive to market movements. This can be both an advantage and a disadvantage. When rates are rising, T-bills yields will respond more quickly to market moves than bank or post office deposit rates which can be sticky. When rates fall, they can head down quickly too.

With RBI withdrawing excess liquidity and embarking on a rate hike cycle, T-bill yields have recently been upward bound. On August 5 2022, after the latest MPC meeting, yields on 364-day, 182-day and 91 day T-bills ruled at 6.23 per cent, 5.89 per cent and 5.56 per cent respectively.  A year ago, the yields were at just 3.39 per cent, 3.53 per cent and 3.73 per cent. Despite being sovereign instruments, the current yields on 91 day and 364 day T-bills compare favourably to 6 month and 1 year deposits with leading banks. SBI and ICICI Bank presently offer just 4.40-5 per cent for 6 month deposits and 5.4-5.75 per cent for one year deposits currently. Post-office time deposits have seen their rates stuck at 5.5 per cent for the last three quarters.

If you track yield movements closely, you can invest in T-bills when yields are upbeat. This page on the CCIL website offers a snapshot of prevailing yields on T-bills here at https://tinyurl.com/yieldscheck

Where to use them?

As sovereign-backed securities that offer high safety of capital, T-bills can fit into your financial plans on three counts. One, you can use them as a bank FD or post office scheme substitute without locking in your money for long periods. T-bills can be particularly useful when market interest rates are headed higher and you don’t want to lock into longer-term FDs. Two, if you receive a windfall gain from a bonus, a property transaction or inheritance you can use T-bills to keep your capital safe until you decide on long-term investment avenues. Three, if you are in the process of rebalancing your portfolio from equity or other assets, you can invest the proceeds in T-bills as a temporary move, until market conditions require you to change your allocations once again. On the flip side though, the interest you receive on T-bills is taxed at your slab rate. To invest in them, you will need to keep close track of RBI’s auction schedule and market yields.

Quick guide
Bonds for periods of up to a year are called T-bills
T-bills carry three maturity periods – 91 days, 182 days and 364 days
They are issued at a discount to their face value and redeemed at par