91-Day T-Bills

Starting from July, 1965, 91-day T-bills were issued at a discount rate ranging from 2.5-4.6 percent per annum. Till July, 1974, the discount rate was 4.6 percent. Even later, the discount rate hovered around the same. The extremely low yield on these bills was totally out of alignment with the other interest rates in the system. Moreover, the Central Bank readily rediscounted these bills due to which the yield for these bills remained more or less artificial. The banks used these instruments to park their funds for a very short period of 1-2 days. This resulted in violent fluctuations of volumes of outstanding T-bills. The RBI had introduced two measures in order to cope with the situation. Firstly, to recycle the T-bills (from October, 1986) under which the bills are rediscounted by the RBI and are resold to the banks. Secondly, an additional early rediscounting fee was imposed, if the banks rediscounted the T-bills within 14 days of purchase. Although this resulted in a decline in weekly fluctuations, the T-bills market did not become an integral part of the money market and the interest rates did not rise considerably as the bulk of T-bills continued to be held by the RBI. The weekly auctions of 91-day T-bills were started in January 1993, which in due course resulted in gradual decline of the T-bills outstanding with the RBI.