Municipal bond issuances hit new record in FY26 due to fiscal support

Backed by AMRUT 2.0 incentives and rising investor demand, India's municipal bond market hits a record, with more cities tapping capital markets in 2025

India’s municipal bond market saw a record number of issuances in the current financial year (FY26), with nine issuances until December, compared with three in the previous year and one in the year before that, Securities and Exchange Board of India (Sebi) data showed.  During the year, municipal bodies beyond the regular issuers accessed the market, with growth not only in volumes but also in the range of issuers. 

As of December 31, 2025, the total municipal bonds outstanding amounted to ₹3,783.9 crore with ₹1,000 crore worth of bonds issued in the calendar year 2025. 

First-time issuers in 2025 included Agra Nagar Nigam, Prayagraj Nagar Nigam, Varanasi Nagar Nigam and Bhavnagar Municipal Corporation, alongside repeat issuers such as Greater Chennai Corporation and Nashik Municipal Corporation. 

Market participants said the fiscal support under the Atal Mission for Rejuvenation and Urban Transformation 2.0 (Amrut 2.0) was a key factor behind the rise in municipal bond issuances. Unlike earlier reform phases, where incentives were indirect or uncertain, the current framework provides quantified incentives that lower the cost of borrowing. First-time issuers are eligible for incentives of ₹13 crore per ₹100 crore of bonds issued, subject to caps, which reduce interest costs over long tenors. For repeat issuers, incentives are linked to green bonds, providing predictability while aligning with environmental, social, and governance (ESG) objectives. This has made bond issuance a viable funding option for urban local bodies (ULBs). 

Amrut 2.0 is a major urban development scheme, launched in October 2021, for a period of five years, designed to provide universal coverage of water supply through functional taps to all households in all the statutory towns in the country.

Further, domestic institutional investors with surplus liquidity and a preference for long-term cash flows have shown demand for municipal bonds rated AA and above, said market participants. 

“One of the most important reasons for the surge in municipal bond issuances this year is the explicit fiscal support provided under Amrut 2.0,” said Venkatakrishnan Srinivasan, founder and managing partner of Rockfort Fincap LLP. “The interest rate and liquidity environment have played a supportive role. With domestic institutional investors sitting on surplus liquidity and looking for long-duration, predictable cash flows, well-structured municipal bonds rated AA and above have found ready demand. For municipalities, this has meant competitive pricing and the ability to lock in long-term funds without the refinancing risks associated with bank loans. In contrast to earlier years, issuers are no longer approaching the market defensively; they are timing issuances to favourable market windows,” he added. 

Issuer preparedness has also improved. Over the recent years, several municipal corporations have strengthened accounting systems, improved audit practices, and ring-fenced revenue streams such as property tax, water charges, and user fees. While challenges remain, a number of ULBs are now able to meet Sebi’s disclosure, escrow, and monitoring requirements. This has reduced execution risk and shortened issuance timelines. 

“We saw a lot of maiden issuances this year because of the discounts on municipal bonds. Unlike 3-4 same issuers seen every year, we saw new issuers and 9-10 issuances have taken place so far and more are lined up,” said a dealer at a private bank.

Market participants said that smaller and mid-sized cities that earlier faced scale or credit constraints are accessing markets through pooled structures supported by state-level entities. Incentives for pooled municipal bonds, along with incentives for renewable energy and energy efficiency projects, have supported this route, especially in states promoting urban infrastructure financing. As a result, the pipeline of potential issuers is expanding. 

Meanwhile, India has not yet seen a municipal bond default or put in place a municipal insolvency framework, and the secondary market remains limited. Investor preference, therefore, remains focused on AA-rated or credit-enhanced structures.