TREASURY BILL MARKET - Working Capital Management

The budgetary deficit of the central government is financed though the issue of Treasury bill and/or drawing down the cash balances with the reserve bank. The treasury bills are sold at a discount by the reserve bank as the agent of the government. The major purchases are banks and the state government. For banks, these bills have additional attraction; they provide an ideal form of short-term investment because of their high liquidity and little of capital in case of sale before maturity. The effective return in this investment is the discount at which they are sold and it is based on the difference between the price at which they are sold and their redemption value. Due to availability of discounting facility on such bill by reserve bank, an investor in treasury bills can earn a positive return on his investment even if the bills are rediscounted one day after their purchase. For banks, they are an eligible asset for computing statutory liquidity ratio (SLR) to be maintained by banks under the Banking Regulation Act. Treasury bills are issued in book entry form known as subsidiary general ledger account to banks and other institutional investors. To individuals, however, they are sold in the form of scripts. In well-developed money markets, treasury bills are an integral part of money market operation and an instrument of short-term borrowing by the government. This is an important tool in the hands of the Central Banks for influencing the level of liquidity in the money market through open market operations.

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