India’s FY27 Union Budget is expected to strengthen supply-side dynamics in the country’s municipal bond market, with enhanced financial incentives likely to accelerate participation and encourage greater reliance on debt capital markets for urban infrastructure funding, according to a report by India Ratings and Research (Ind-Ra).
The agency said the new incentive framework could also promote financial and operational discipline among municipal corporations, even as larger single bond issuances are expected to materialise gradually. “The medium-term outlook for municipal bond activity remains strong,” said Anuradha Basumatari, Director, Public Finance, Ind-Ra, in the report.
Urban local bodies (ULBs), tasked with delivering essential civic services, have historically faced financing constraints that limited infrastructure creation and service quality. Since municipal bond guidelines were introduced in 2015 and incentives under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) were launched in October 2021, ULBs have increasingly explored bond issuances, though overall volumes remain modest.
A supportive regulatory framework and central government incentives have enabled several ULBs to access capital markets since 2017. As of 2 February 2026, 21 ULBs had completed 28 municipal bond issuances totalling Rs 40,347.50 million since FY18, with outstanding bonds amounting to Rs 35,847.35 million, Ind-Ra said.
The largest single issuance so far was Rs 2,440 million by Indore Municipal Corporation in FY23. Issuances remained steady during the first ten months of FY26, reaching Rs 12,508.50 million and surpassing the previous annual high of Rs 9,899 million recorded in FY19. Ind-Ra expects further deals in the near term, noting that ULBs such as Nashik Municipal Corporation are actively working towards bond issuances, including a proposed green bond.
The FY27 budget introduces a new incentive of Rs 1,000 million for every municipal bond issuance exceeding Rs 10,000 million. Ind-Ra said this measure is likely to encourage larger ULBs to tap debt markets to fund large-scale urban infrastructure projects while strengthening governance and financial discipline.
Existing AMRUT incentives will continue to support small and mid-sized ULBs. Under earlier provisions, a first municipal bond qualifies for an incentive equal to 13 per cent of the amount raised, or Rs 130 million for every Rs 1,000 million raised, capped at Rs 260 million. Subsequent issuances must be structured as green bonds, limited to sectors such as water, sanitation, renewable energy, or urban resilience and are eligible for Rs 100 million per Rs 1,000 million raised, subject to a maximum of Rs 200 million.
Green issuances remain limited, with examples including Ghaziabad Nagar Nigam, Indore Municipal Corporation, Ahmedabad Municipal Corporation, Vadodara Municipal Corporation, Surat Municipal Corporation, and Pimpri Chinchwad Municipal Corporation.
The 16th Finance Commission has recommended Rs2.32 trillion in basic grants for ULBs and Rs290.16 billion in performance-based funding for FY27–FY31. It also proposed a special infrastructure component grant of Rs561 billion for select cities with populations between 1 million and 4 million, tied to wastewater management projects. These projects will be funded in a 60:40 ratio between the union government and the combined contribution of state governments and ULBs.
According to Ind-Ra, the incentive framework and targeted grants have created a favourable environment for financially strong ULBs to fund capital expenditure through a mix of internal resources, grants, and market borrowings.
Issuance sizes, however, remain relatively small, largely capped at Rs2,000 million as ULBs continue to test investor appetite. Coupon rates for municipal bonds issued between FY18 and the first 10 months of FY26 ranged from 7.15 per cent to 10.23 per cent, with an average spread of 142 basis points over the 10-year Government of India yield.
Bond pricing continues to depend on factors such as interest rates, tenure, credit ratings, inflation expectations, and liquidity conditions.
Ind-Ra said the enhanced incentive, alongside stable inter-governmental fiscal transfers, regulatory support, and ongoing AMRUT benefits, holds “considerable promise” for municipal bond activity by encouraging both new and repeat issuances.
Large-scale offerings are likely to emerge over time as ULBs identify viable projects, obtain approvals, and develop sustainable funding structures. Municipal bodies that have historically relied on bank loans and only partially tapped the bond market may now be more inclined to utilise bond issuances to capitalise on the strengthened incentive framework, the report added. |
