The Finance Ministry has permitted the use of municipal bonds as security for repo and reverse repo transactions, permitting municipal bodies to raise funds for infrastructure projects, reported Business Line.
By making these bonds acceptable collateral for short-term borrowing, the government has opened a new door for banks, mutual funds, insurers and companies to invest in them, creating a new asset class.
Experts say this move will broaden the investor base for such securities, boosting demand and liquidity. So far, municipal bonds have remained largely illiquid, held by a narrow pool of long-term investors such as pension or ESG funds. By allowing their use in repo markets, the government has allowed a wider spectrum of financial participants to invest in these securities.
“The Central Government hereby specifies the municipal debt securities, having the meaning assigned to it in the Securities and Exchange Board of India Act, 1992 or the rules or regulations made there under, to be as security under this section for the purposes of repo and reverse repo,” the Finance Ministry notification said.
According to data released by the Securities and Exchange Board of India (SEBI), as of 30 September, over ₹3,300 crore has been raised through municipal bonds.
New asset class
From the perspective of market participants who engage in repo and reverse repo transactions, this move allows them to diversify their investments into a new asset class, which could potentially offer better returns.
An ICRA report on the Indian Municipal Bond Market estimated that more than 10 issuances in FY25/FY26 could raise funds in excess of ₹1,500 crore.
However, this remains negligible relative to the size of central/state government issuances. “In ICRA’s view, challenges such as improvement in the urban local bodies’ (ULB) own credit quality, lack of adequate disclosure and information systems would remain critical for a healthy municipal bond market in India,” the report said.
Further, it highlighted that key enablers for the traction in the Indian municipal bond market can be attributed to measures taken by the government and regulators. In 2015, SEBI (Issue and Listing of Debt Securities by Municipalities) regulations were issued, which defined the status of bonds, thus garnering investor interest.
Subsequently, in FY18, the Government of India initiated an incentive scheme (about ₹13 crore for every ₹100-crore bond issuance), providing impetus to ULBs in using this mode of finance.
