T Bills Market

The Reserve Bank of India, banks, mutual funds, financial institutions, primary dealers, satellite dealers, provident funds, corporates, foreign banks, and foreign institutional investors are all participants in the T – bills market. The state governments can invest their surplus funds as non-competitive bidders in T-bills of all maturities.

Sale of T- Bills:

The sale of T-bills is conducted through an auction. The method helps in price discovery, a process wherein prices in the market reflect the relative cost of production and consumption utilizes with a view to achieving the optimum allocation of resources in the economy. In case of auctions, competitive bids are submitted by he participants to the Reserve Bank and the bank decides the cut off yield / price and makes the allotment on such a basis. For an auction to be meaningful, it is necessary that auctions are conducted on a competitive bidding basis. For this purpose, the participation should be large and varied in nature. A wider participation in auctions results in increased competition, yielding better prices and improving the auction results. Primary dealers, banks, corporates, mutual funds, and others participate in the competitive bids.

Besides allotting T- bills through auction, the Reserve Bank accepts non-competitive bids from state governments, non-government provident funds, and other central banks. Non competitive bids are accepted to encourage participants who do not have expertise in bidding. Such bids are a more efficient way of encouraging retail participation instead of having a large number of retail investors bidding competitively on their own. The Reserve bank also participates on a non competitive basis to primarily take up the undersubscribed issues. Non competitive bidders are allotted T- bills at a weighted average price of the successful competitive bids. Non-competitive bids are accepted outside the notified amount.

Types of Auctions:

There are two types of auctions: (1) multiple price auction and (2) uniform price auction

Multiple Price Auction: The Reserve bank invites bids by price, that is the bidders have to quote the price (per Rs 100 face value) of the stock which they desire to purchase. The bank then decides the cut off price at which the issue would be exhausted. Bids above the cut off price are allotted securities. In other words, each winning bidder pays the price it bid.

The advantage of this method is that the Reserve bank obtains the maximum price each participant is willing to pay. It can encourage competitive bidding because each bidder is aware that it will have to pay the price it bid, not just the minimum accepted price. The disadvantage is that bidders bid more cautiously (that is, offer lower prices) in these auctions. This is so because it may happen that bidders who paid higher prices could face large capital losses if the trading in these securities starts below the marginal price set at the auction. This is known as the “winner’s curse”. The winner’s curse can be a problem in those markets where price volatility is high. In order to eliminate the problem, the Reserve bank introduced uniform price auction in case of 91 day T-bills.

Uniform price Auction: In this method, the Reserve bank invites bids descending order and accepts those that fully absorb the issue amount. Each winning bidder pays the same (uniform) price decided by the Reserve Bank. In other words, all winning bidders are awarded the auctioned amount at the same price.

The advantages of the uniform price auction are that they tend to minimize uncertainty and encourage broader participation. On the other hand, it may be possible that uniform price auctions could reduce the need to prepare for the auction as allowed allotment at a uniform price reduces the incentive to bid. Moreover, there are angers of irresponsible bidding or of collusion in a uniform auction.

Most countries follow the multiple price auctions. However, now the trend is a shift towards the uniform price auction.

Uniform price auction was introduced on an experimental basis on November 6, 1998, in case of 91 day T- bills. Since 1999-2000, 91 day T-bill auctions are regularly conducted on a uniform price basis.

There exists a fixed calendar for auctions of all types of treasury bills. The Reserve Bank issues a press communication, two to three days prior to the auction and invites bids, indicating the date of the auction and terms such as the amount of auction and type of auction.