Context:
The RBI announces a decrease in the amount of government Treasury bill sales.
Key Highlights
- To address tight liquidity in the banking system, the Reserve Bank of India (RBI) has announced a significant reduction in government treasury bill sales.
- Alongside this, RBI has introduced a fresh set of bonds with an aggregate amount of ₹60,000 crore (face value) for the Centre’s buyback operations.
- This move is aimed at easing cash constraints for banks, which have been exacerbated by limited government spending during the ongoing general elections.
- By decreasing the availability of treasury bills and offering bonds for repurchase at favorable rates, the RBI intends to inject liquidity into the banking system and lower borrowing costs for banks.
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What is a Treasury bill?
- Treasury bills, issued by the RBI on behalf of the Government of India (GOI), are short-term financial instruments in the form of promissory notes.
- Their primary purpose is to address the central government’s short-term financial needs.
- For investors, they represent one of the safest and most liquid investment options among government securities.
- Treasury bills are available in four different tenures: 14, 91, 182, and 364 days.
- Investors can potentially earn some profit from a T-bill as it is issued at a discounted price and redeemed at its original, higher value.
About the Government Bond Buyback
- It involves the government using its cash reserves to pay off a portion of its outstanding debt by purchasing bonds before their maturity date.
- It’s a strategic tool used in government securities markets to manage refinancing and liquidity risks.
- It eases some of the pressure on scheduled debt repayment obligations.
- It also has the potential to bring down the government’s interest costs, as a new source of demand typically pushes up bond prices and brings down their yields.
What is Bond?
- A bond is a fixed-income instrument and investment product where individuals lend money to a government or company at a certain interest rate for an amount of time.
- The entity repays individuals with interest in addition to the original face value of the bond.
- Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations.