Recent Developments in India's Municipal Bond Market

Introduction
 

1. India's municipal bond market has gained momentum since FY2018, buoyed by targeted government incentives, as highlighted in the latest ICRA report. The report underscores strong growth, driven by fiscal reforms and policy frameworks like AMRUT 2.0, which offer central grants for bond issuances tied to urban development goals.
2. While the United States has developed a vibrant municipal bond ecosystem funding roads, schools, and sanitation through bond issuances, India’s experience has remained limited and fragmented. However, recent trends show that the country is making slow but steady progress toward activating this crucial financing channel.
    

Recent Developments
 

1. Projected Growth: Municipal bond issuances are anticipated to surpass ₹1,500 crore in FY2025–26, driven by governmental initiatives and regulatory support.
2. NSE Municipal Bond Index: In February 2023, NSE Indices Ltd launched the Nifty India Municipal Bond Index, tracking the performance of municipal bonds issued by Indian municipal corporations. This index aims to enhance transparency and attract more investors to the market. ​
3. Dedicated Information Platform: The NSE's recent launch(March 2025) of a dedicated municipal bond website serves as a centralized hub for market participants, providing comprehensive data on issuances, credit ratings, trading volumes, and historical performance, thereby improving market accessibility and investor awareness.
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Understanding Municipal Bonds in India
 

1. Definition:
   1. Municipal bonds are debt instruments issued by Urban Local Bodies (ULBs) or municipal corporations to finance public infrastructure projects such as roads, schools, and water supply systems.
   2. Investors who purchase these bonds lend money to the issuing body in exchange for periodic interest payments and the return of the principal amount upon maturity.
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2. Historical Context:
   1. First Issuance: Bangalore Municipal Corporation pioneered India's municipal bond market by issuing bonds worth ₹125 crore in 1997. Ahmedabad Municipal Corporation followed with a ₹100 crore issuance in 1998. ​
   2. Recent Issuances: In February 2023, Indore Municipal Corporation issued India's first municipal bond open to retail investors, marking a significant milestone in broadening the investor base.
       
3. Regulatory Framework:
   1. SEBI Guidelines (2015):
      • The Securities and Exchange Board of India (SEBI) established the "Issue and Listing of Debt Securities by Municipalities" regulations in 2015, providing a structured framework for municipal bond issuances. Key provisions include:
      • The issuing municipality must have a positive net worth in each of the three preceding financial years
      • No default in debt obligations in the past year
      • A minimum credit rating of 'BBB-' from a SEBI-registered credit rating agency.​
      • The municipality and its promoters/directors should not be classified as willful defaulters.
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4. Types of Municipal Bonds in India:
   1. General Obligation Bonds: These bonds are backed by the full faith and credit of the issuing municipality, with repayments made from general revenues. They are typically used to fund projects that do not generate direct income, such as public parks or street lighting. ​
   2. Revenue Bonds: Issued to finance specific revenue-generating projects like toll bridges or water treatment facilities, these bonds are repaid from the income produced by the project.
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5. Key Features:
   1. Tenure: Municipal bonds in India typically have maturities ranging from 3 to 10 years, providing medium to long-term investment opportunities.​
   2. Interest Rates: The coupon rates vary based on the creditworthiness of the issuing body and prevailing market conditions. For instance, the Vadodara Municipal Corporation issued bonds in March 2024 with an interest rate of 7.9%. ​
   3. Tax Implications: Interest earned on municipal bonds may be exempt from certain taxes, offering a tax-efficient investment avenue. However, investors should verify the specific tax benefits applicable to each issuance.
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Recent Trends and Highlights in India’s Municipal Bond Market
 

1. Market Expansion: Modest Growth
   1. Since FY2018, 11 ULBs issued ₹2,660 crore via 17 municipal bonds, marking steady growth.
   2. ICRA predicts ₹1,500 crore more by FY2026, driven by urban infrastructure needs and policy support.
   3. However, India's market pales in comparison to the US, with annual issuances exceeding $500 billion.
       
2. Selective Participation by High-Rated ULBs
   1. Dominated by ULBs with AA+ ratings, backed by strong audits, disclosures, and revenue streams.
   2. Only 25–30 ULBs qualify as investment-grade (BBB– or higher), per SEBI rules.
   3. Structured Payment Mechanisms (SPM), like DSRA and SFA, bolster investor trust.
       
3. Rise of Green Bonds for ESG Investments
   1. Nearly 50% of municipal bonds classified as green, funding water, solar, and energy-efficient infrastructure.
   2. Cities like Pune, Indore, and Rajkot lead efforts to attract ESG-aligned institutional capital.
   3. Of ₹2,660 crore raised, ₹1,210 crore went to water projects, and ₹930 crore to renewable energy.
       
4. Policy and Technology Driving Transparency
   1. AMRUT 2.0 offers ₹13 crore per ₹100 crore raised, tied to fiscal reforms and governance standards.
   2. SEBI mandates audited financials and investment-grade ratings, limiting participation to disciplined ULBs.
   3. Digital platforms like CityFinance.in and NSE Municipal Bond Portal enhance real-time disclosures.
       
5. Revenue Challenges and Bottlenecks
   1. Only 41% of ULB revenue stems from own sources, with 54% reliant on government transfers.
   2. Property tax contributes merely 0.17% of GDP, highlighting weak collection performance.
   3. Significant disparities exist: Pune collects 7.7x more property tax than Ghaziabad, despite similar demographics.
       
6. Reviving Pooled Bonds for Smaller Cities
   1. Pooled financing structures allow smaller ULBs to jointly issue bonds via SPVs, reducing risks and costs.
   2. This approach is being revived for Tier-II and III cities like Agra, Prayagraj, and Varanasi under AMRUT and UIDF.
   3. Enables decentralized infrastructure development by aggregating repayment flows.
       
7. Liquidity and Retail Participation Challenges
   1. Secondary markets remain thin, with most bonds held till maturity by institutions.
   2. Retail participation is negligible, with Indore's 2023 bond being a rare example targeting individuals.
   3. SEBI reforms (e.g., ₹10,000 minimum denominations, FPI access) are yet to boost liquidity and investor diversity.
       

Key Drivers Behind the Growth of Municipal Bonds in India
 

1. Incentives through AMRUT and Urban Missions
   • AMRUT 2.0 grants ₹13 crore per ₹100 crore raised (capped at ₹26 crore/ULB), driving credit-worthy cities to bond markets.
   • Incentives are tied to reforms like audited financials, credit ratings, and Structured Payment Mechanisms (SPMs), ensuring fiscal responsibility.
      
2. Strong Credit Ratings and Safeguards
   • Bonds from ULBs with AA+ ratings backed by stable revenues, DSRA, and escrowed property taxes.
   • Mechanisms like Sinking Fund Accounts (SFA) and Interest Payment Accounts (IPA) reduce risks and ensure investor trust.
      
3. Green and ESG-Aligned Urban Investments
   • Green bonds fund sustainable infrastructure like solar, wastewater treatment, and energy-efficient projects, attracting ESG-focused capital.
   • ₹930 crore raised so far, shifting focus toward climate-resilient urban finance.
      
4. Tech-Driven Transparency and SEBI Reforms
   • Platforms like CityFinance.in and NSE Municipal Bond Portal enable real-time access to financials, improving investor confidence.
   • SEBI reforms (e.g., lower bond denominations, FPI access) streamline market participation and compliance.
      
5. Urban Governance and Capacity Building
   • Programs like AMRUT boost ULBs' financial reporting and project management skills.
   • Early adopters like Pune, Indore, and Hyderabad set benchmarks for structured bonds in urban finance.
      

Key Challenges in the Growth of India’s Municipal Bond Market

 

1. Limited Issuer Base
   1. Only 25–30 ULBs meet SEBI's investment-grade (BBB– or higher) criteria, excluding many smaller cities due to weak disclosures, unaudited finances, and poor fiscal benchmarks.
   2. Even populous cities often lack institutional capacity for bond issuance, leading to market concentration.
       
2. Weak Revenue Autonomy
   1. Only 41% of ULB revenues come from internal sources.
   2. Property tax, the main revenue source, accounts for just 0.17% of GDP, with vast disparities (e.g., Pune collects 7.7x more than Ghaziabad).
       
3. Illiquid Secondary Market
   1. Bonds are mostly held to maturity, with negligible retail participation and thin secondary trading.
   2. SEBI’s lower face values (₹10,000) and FPI access reforms have yet to spur market liquidity or diversification.
       
4. High Issuance Costs
   1. Compliance requirements, like credit ratings, audited financials, and SPMs, are costly and resource-intensive.
   2. Smaller cities face additional challenges with recurring costs (e.g., rating renewals, trustee fees), reducing net funds for projects.
       
5. Lack of Tax-Free Status
   1. Modern municipal bonds lack tax-free status, unlike early issuances (e.g., Ahmedabad 1998), making them less appealing to retail investors.
   2. No formal policy for tax-exempt green bonds or credit guarantees limits innovation and retail appetite.
       

India vs. USA: A Comparison of Municipal Bond Markets
 

Category	India	United States
Market Size	₹2,660 crore issued (FY2018–FY2025) across 11 ULBs	Over $500 billion issued annually, with thousands of local issuers
Issuer Base	Few large ULBs with investment-grade ratings	Thousands of local governments, school districts, and counties
Credit Quality	25–30 ULBs are investment-grade (out of thousands)	Over 99% of muni(municipal) bonds are investment-grade, supported by established frameworks
Use of Funds	Focused on water, sewerage, street lighting, and green infrastructure	Broad scope: schools, roads, utilities, hospitals, and pensions
Retail Participation	Minimal; mainly mutual funds and insurers invest	High; individuals hold ~66% of municipal bonds
Secondary Market Liquidity	Thin and illiquid; bonds mostly held till maturity	Highly liquid with active daily trading and benchmarks
Tax Incentives	Limited; no recent tax-free status (except Ahmedabad 1998)	Interest often tax-free at federal and state levels, boosting retail appeal
Transparency Platforms	Emerging platforms like CityFinance.in and NSE portal (2025)	Mature platforms with real-time updates, benchmarks, and investor dashboards
Insolvency Framework	No clear insolvency resolution for municipal defaults	bankruptcy allowed for municipalities in many states (with oversight)
Policy Support & Ecosystem	Evolving support via AMRUT, UIDF, Smart Cities programs	Long-established bond banks, rating norms, and dedicated muni bond agencies

Case Studies & Recent Issuances
 

1. Pune Municipal Corporation

• Active issuer since FY2017; funds directed toward water and sewage projects.
• Bonds consistently rated AA or higher with structured payment mechanisms.

2. Hyderabad Water Board (HMWSSB)

• Issued ₹200 crore green bonds (FY2021) for sewerage infrastructure.
• Offered interest rates (8.1%–8.4%) attractive to institutional investors.

3. Indore Municipal Corporation (IMC)

• First retail bond issuance (₹244 crore, 2023) targeted sustainable projects.
• Rated AA+, heavily subscribed by retail and institutional investors.

4. Rajkot Municipal Corporation (RMC)

• ₹100 crore bond (2024) for water and wastewater projects, escrow-backed repayments.
• Part of newer ULBs entering bond markets via AMRUT 2.0 support.

5. Upcoming Pooled Bonds

• Cities (Agra, Varanasi, Prayagraj) preparing pooled bond issuances via SPVs.
• Aims to leverage combined credit strength and reduce borrowing costs.

Future Outlook for India’s Municipal Bond Market
 

1. Pooled Bond Models for Tier-II & Tier-III Cities:
   • Revival of pooled financing under AMRUT and UIDF enables smaller Urban Local Bodies (ULBs) like Agra and Varanasi to access funds by sharing risk through SPVs, lowering borrowing costs, and bypassing individual credit ratings. This could add over 100 ULBs to the municipal bond ecosystem by 2030.
2. Green & Thematic Bonds for ESG Investment:
   • Over 50% of recent issues are green bonds, funding projects in solar energy, wastewater recycling, e-mobility, and nature-based solutions aligned with India's climate goals and SDGs. Growth depends on frameworks for certification, impact metrics, and international co-financing.
3. Tech-Driven Transparency & Monitoring:
   • Platforms like CityFinance.in and ULB credit dashboards offer real-time data on ratings and financials, enhancing investor confidence through tools like GIS revenue mapping and project-level tracking. This reduces information gaps and standardizes reporting.
4. Market Expansion via Fiscal Reforms:
   • Growth hinges on improving ULB creditworthiness via property tax reforms, financial transparency, standardized accounting, and resolution of insolvency issues. Tax incentives, retail participation, and secondary market liquidity are essential for sustainability.
      

Conclusion
 

As Indian cities expand, sustainable and accountable urban financing is critical. Municipal bonds present a promising solution but require addressing challenges like low credit penetration, weak own revenues, and illiquid secondary markets. While U.S. practices offer inspiration, India must adapt them contextually. By adopting pooled bonds, green financing, and tech-driven transparency, ULBs can revolutionize infrastructure funding. With gradual reforms, municipal bonds can make cities more livable, self-reliant, and climate-resilient.