Context

Recently,  the Reserve Bank of India (RBI) has responded to tight liquidity conditions in the banking system by announcing a significant reduction in the government’s treasury bill sales and introducing a new selection of bonds for the Centre’s buyback operations.

Treasury Bills

• About: T-Bills are financial instruments in the money market, representing short-term debt issued by the Government of India.
• Tenure of Treasury Bills: Currently, they are issued in three durations, 91 days, 182 days, and 364 days.
• Features of T-Bills: These securities are zero coupon bonds, meaning they do not pay interest. Instead, they are issued at a discount and redeemed at face value upon maturity.
• Issuance of Treasury Bills: Treasury bills were introduced in India in 1917 and are issued through auctions conducted by the Reserve Bank of India (RBI) at regular intervals.
• Ownership of T-Bills: Individuals, trusts, institutions, and banks can purchase T-Bills, although they are typically held by financial institutions.
• Role of T-Bills: Treasury bills play a crucial role in the financial market beyond being investment instruments. Banks use T-Bills as collateral to obtain funds from the RBI under repo agreements and to meet their Statutory Liquidity Ratio (SLR) requirements.

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Bond Buyback

Bond buyback is the process through which the central and state governments repurchase their existing securities from holders before the maturity date.

• Aim: Bond buybacks are liability management tools frequently used in government securities markets to manage refinancing and liquidity risks.

Objectives of Bond Buyback:

• Reduction in Cost: Purchasing high-coupon securities to minimize interest expenses.
• Enhancing Liquidity: Removing illiquid securities to boost liquidity in the government securities (G-Secs) market.
• Liquidity Injection: Adding liquidity to the financial system.

Benefits of Bond Buyback:

• Boost in Banking Liquidity: Banks, being major holders of government bonds, receive cash from the government when they sell bonds, thereby augmenting liquidity in the banking system.
• Assistance During Liquidity Shortages: This cash influx can be crucial during times of liquidity deficits for banks, aiding in stabilizing the financial system.

Disadvantages of Bond Buyback:

• Capital Allocation Concerns: Buybacks entail deploying funds to repurchase shares, prompting investors to question why companies aren’t investing in business growth instead. 
  • This can lead to the perception that companies are not maximizing their capital effectively.
• Growth Constraints and Investor Disinterest: It May appear to stifle growth and turn off investors.
• Impact on Share Price: It May lead to drop in share price 

Bonds

A bond is a financial instrument that symbolizes a loan provided by an investor to an entity, usually a corporation or government.

• Features:
  • Interest Rate Options: Bonds may feature fixed or variable interest rates, offering investors predictable or adjustable returns.
  • Term of Investment: Bonds come with a specified maturity date, marking when the principal amount is reimbursed to the investor.

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