Municipal bonds, commonly referred to as ‘muni bonds’, are issued by urban local bodies (ULBs) and agencies to raise funds for infrastructure development within municipalities. Bengaluru was the first city in India to issue muni bonds in 1997, followed by ULBs in Nashik and Ahmedabad. Since then, the municipal bond market has experienced limited activity.
In July 2015, the Securities and Exchange Board of India (SEBI) introduced regulations aimed at revitalizing the stagnant municipal bond market. Despite these efforts, and various reform-oriented programs such as the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) and the Smart Cities Mission initiated by the Central and State governments, success in mobilizing funds through municipal bonds has been minimal.
The U.S. Treasury Department’s Office of Technical Assistance (OTA) has played a significant role in facilitating fundraising among ULBs in collaboration with the Ministry of Housing and Urban Affairs (MoHUA).
Under AMRUT 2.0, ULBs can receive incentives of up to ₹13 crore per ₹100 crore for first-time bond issuances, capped at ₹26 crore. For subsequent issuances, bonds must qualify as green bonds, targeting areas like water supply, sanitation, renewable energy, or urban resilience, to qualify for lower incentives of ₹10 crore per ₹100 crore, capped at ₹20 crore. MoHUA has also extended these incentives to pooled municipal bonds, which allow smaller ULBs to aggregate their borrowings through state-level pooled finance entities.
In February 2023, the NSE Indices launched the India Municipal Bond Index (IBMX), marking the first municipal bond index in India, which tracks the performance of high-credit-quality municipal bonds using a total return methodology.
Green and environmental, social, and governance (ESG)-related bonds are gaining traction, as evidenced by strong market responses to issuances from Indore, Ghaziabad, and Pimpri-Chinchwad. Notably, the Vadodara Municipal Corporation (VMC) reported significant success, with its ₹100-crore bond issue in 2022 oversubscribed by ten times. The effective coupon rate was reduced to 4.55% due to AMRUT incentives, showcasing a landmark achievement.
The success of VMC’s bond issuance is largely attributed to its solid governance practices, including the adoption of accrual-based accounting, timely audits, and the strategic use of proceeds for defined infrastructure projects. To support other municipalities, VMC published a comprehensive case study booklet titled The Green Book, documenting its journey through the green bond issuance process, including challenges encountered, structuring measures, stakeholder coordination, and valuable lessons learned.
Despite these advancements, challenges persist in the municipal bond market, as highlighted by the rating agency ICRA. Key issues include ULBs’ heavy reliance on government grants, insufficient and untimely financial disclosures, market illiquidity, the lack of a secondary bond market, stringent compliance demands, and the generally weak credit quality among ULBs when accessing capital markets.
The VMC model offers essential insights for other municipalities considering muni bond issuances. SEBI Chief Tuhin Kanta Pandey remarked on the importance of state governments solidifying asset monetization plans to further enhance infrastructure development.
Cash-strapped municipalities across India may need to consider the muni bond path more earnestly to improve the quality of infrastructure in cities and towns, particularly as they face recurring challenges during the monsoon season.
Published on September 19, 2025.
