The Finance Ministry has permitted the use of municipal bonds as collateral in repo and reverse repo transactions. This move allows banks, mutual funds, insurers, and corporations to use these bonds for short-term borrowing, thereby improving liquidity and market participation in the municipal bond segment.
Municipal bonds are debt instruments issued by Urban Local Bodies (ULBs) to raise funds for infrastructure and public service projects such as roads, water supply, sanitation, and waste management. Investors earn periodic interest, while ULBs gain much-needed capital for local development.
Wider Investor Base: Until now, municipal bonds were primarily held by long-term or ESG-focused investors. Repo eligibility opens participation to short-term financial institutions and market intermediaries.
Liquidity Boost: Banks, mutual funds, and insurers can now trade these bonds in the money market, thereby enhancing liquidity, price discovery, and overall market depth.
Urban Infrastructure Support: Easier fund mobilisation will help ULBs finance critical urban infrastructure, contributing to city-level economic growth and resilience.
As of September 30, 2025, Indian cities have issued municipal bonds worth ₹3,300 crore. Leading issuers include:
• Greater Hyderabad: ₹495 crore
• Ahmedabad: ₹400 crore
• Pimpri-Chinchwad: ₹400 crore
• Indore: ₹383.9 crore
These cities have demonstrated strong fiscal management and investor confidence, encouraging other ULBs to explore bond-based financing.
According to the Securities and Exchange Board of India (SEBI), this inclusion under the SEBI Act, 1992 will enhance the marketability and acceptance of municipal bonds. Their eligibility for repo and reverse repo transactions gives them official recognition as secured financial assets, promoting better risk assessment, transparency, and governance standards.
Despite recent growth, municipal bond issuance remains modest compared to Central and State bonds. Reports by ICRA highlight several persisting issues:
• Weak credit profiles of many ULBs
• Inadequate financial disclosure systems and transparency
• Low credit rating penetration among smaller municipalities
• Limited technical capacity for bond structuring and compliance
India’s municipal bond market has evolved gradually through a series of reforms:
• 2015: SEBI issued comprehensive guidelines defining norms for municipal bond issuance and listing.
• 2018: The Government launched an incentive scheme providing ₹13 crore per ₹100 crore of bond issuance to encourage ULB participation.
• 2025: The inclusion of municipal bonds in repo and reverse repo transactions marks the third major step toward making them a mainstream investment asset.
The Finance Ministry’s decision to allow municipal bonds for repo and reverse repo transactions marks a pivotal reform in India’s financial markets. It widens investor participation, enhances liquidity, and strengthens fiscal responsibility among ULBs, thereby facilitating sustainable urban infrastructure financing. Though challenges like creditworthiness and transparency remain, this reform is a vital step toward integrating local government finance into India’s broader capital market framework.
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