Cash Management Bills

The government collects tax in lumps and spends continuously. Some weeks the account runs short even though the year's budget is perfectly sound. That is a timing problem, not a funding problem, and it needs a timing instrument.

Cash Management Bills are that instrument. They are essentially very short-term Treasury Bills, issued by the Government of India to fund the temporary mismatches in its cash flow, and they mature in less than 91 days — shorter than the shortest regular T-Bill.

Like T-Bills they are discounted instruments: issued below face value, carrying no coupon, and redeemed at par.

Where they sit. The RBI issues three regular Treasury Bills — 91-day, 182-day and 364-day — auctioned weekly, with a notified issuance calendar published every quarter. CMBs sit below all of them. The workbook describes them as basically unstructured T-Bills maturing within 91 days: unstructured because they are issued as and when a cash gap appears, not on a published calendar.

When they began. CMBs were launched in 2010.

What they have been used for. The workbook records that CMBs have been used extensively by the RBI for smoothing systemic issues — liquidity management after demonetisation in 2016, and forex market volatility in 2013.

How the return arises. There is no coupon. The investor buys below Rs 100 and is repaid Rs 100 at maturity, and the entire return is that discount. Annualise it against the price paid and the holding period to get the yield.

Discount    = Face value - Issue price

Yield (%)   = (Discount / Issue price) x (365 / days to maturity) x 100

The RBI announces Rs 20,000 crore of 40-day Cash Management Bills to cover a gap between an advance-tax inflow and a scheduled redemption. The auction settles at Rs 99.24 per Rs 100 of face value.

For the government:

Amount raised   = 20,000 crore x 99.24/100  = Rs 19,848 crore
Repaid in 40 days at par                     = Rs 20,000 crore
Cost of the bridge                           = Rs   152 crore

For a treasury investor placing Rs 10 crore of face value:

Yield = (7,60,000 / 9,92,40,000) x (365/40) x 100
      = 0.76584% x 9.125
      = 6.99% per annum

Why a corporate treasurer buys them. A company holding Rs 10 crore earmarked for a payment 40 days away has three obvious homes for it: a current account at nil, a short deposit, or this. The CMB carries sovereign credit, matches the horizon almost exactly, and returns Rs 7.6 lakh for the 40 days. Its one drawback is the mirror of its advantage — it is issued when the government needs it, not when the treasurer wants it.

Chapter 9 (Investing in Fixed Income Securities) introduces CMBs twice: once among the money market instruments alongside Treasury Bills, commercial paper and certificates of deposit, and again in the discussion of government securities issuance. Questions are factual and easy marks if the numbers are known: what a CMB is for, its maximum tenor, who issues it, and how it differs from a Treasury Bill.

• Less than 91 days. A 91-day instrument is a regular Treasury Bill; a CMB matures within 91 days.
• The Government of India issues them; the RBI manages the issuance. The obligor is the sovereign, which is why they carry no credit risk.
• They fund a timing gap, not a deficit. The purpose is temporary cash-flow mismatch, and that phrase is what questions test.
• Discounted, not coupon-bearing. There is no interest payment; the return is the difference between issue price and par.
• No fixed calendar. Regular T-Bills are auctioned weekly against a quarterly issuance calendar. CMBs are unstructured and appear when needed.
• Annualise on the price paid and the actual days. Using face value in the denominator, or assuming a 90-day quarter, gives a wrong yield.
• 2010 is the launch year; 2013 (forex volatility) and 2016 (post-demonetisation liquidity) are the workbook's examples of heavy use. Do not merge the dates.