India’s Municipal Bond Market Sees Sharp Revival in FY26

India’s municipal bond market is having its busiest year yet, driven by policy support, improving finances at city bodies, and strong demand from long-term investors. After years of fits and starts, the segment is finally showing signs of scale.

By December of the current financial year, nine municipal bond issuances had already hit the market. That is a sharp jump from three issuances last year and just one the year before. Data shows that the total outstanding value of municipal bonds stood at ₹3783.9 crores as of September 30, 2025. Of this, nearly ₹1000 crores were raised in calendar year 2025 alone. This marked the strongest single-year issuance so far.

The rise is drawing attention because municipal bonds have long been seen as a tough sell in India, given weak balance sheets at urban local bodies (ULBs) and patchy disclosure standards. This year’s numbers suggest something has changed.

AMRUT 2.0 Pushes Cities to Tap Markets

Much of the recent momentum is being linked to fiscal incentives under the Atal Mission for Rejuvenation and Urban Transformation 2.0 (AMRUT 2.0). The scheme provides direct financial support to ULBs that raise funds through bond issuance. It effectively lowers their borrowing costs.

A first-time issuer can receive incentives of up to ₹13 crores for every ₹100 crores raised. That support narrows the gap between bond yields and bank lending rates. It makes market borrowing viable for city bodies that would otherwise hesitate to borrow.

Repeat issuers get additional benefits if they tap the market through green bonds. These incentives are tied to environmentally linked projects, which have helped some municipal corporations align borrowing plans with clean water, sewage treatment, and urban mobility projects. Bankers say this has encouraged cities to think beyond one-off issuances and build a borrowing track record.

Investors Want Steady Cash Flows

The supply push has met a receptive investor base. Domestic institutional investors, flush with surplus liquidity, have been actively looking for long-duration assets that offer predictable returns. Municipal bonds, especially those rated AA or higher, meet that requirement.

Market participants said yields on high-rated municipal bonds remain attractive when adjusted for risk, particularly in an environment where corporate bond spreads have compressed. For investors, the long tenure helps match liabilities without taking on excessive credit risk.

Still a Long Road Ahead

Despite the record numbers, municipal bonds are a tiny slice of India’s overall debt market. Analysts caution that sustained growth will depend on consistent disclosures, stable revenue collections, and continued policy backing. Slippage on these fronts could slow momentum.

Source:

Business Standard
Whalesbook