Recent municipal bond offerings from Greater Chennai Corporation (GCC) and Agra Nagar Nigam have generated a lot of market interest, achieving subscription rates of 4.2 and 3.5 times respectively. Despite this enthusiasm, India’s municipal bond market remains nascent, with around 55 issuances totalling about ₹5,000 crore since inception in 1997.
Municipal bonds, commonly referred to as muni bonds, are debt instruments issued by municipal corporations and related authorities to finance public projects. The market structure currently favours institutional investors through private placements, with limited retail investor participation.
Structure
India has seen 17 municipal corporations, including prominent cities such as Pune, Greater Hyderabad, GCC, Indore, Greater Visakhapatnam and Surat, raise bonds. So far, local bodies maintaining high credit ratings of AA+, AA, or AA– have accessed the market. According to ICRA Research, the funds raised through these issuances have primarily supported infrastructure projects including water supply systems, sewerage networks, wastewater management facilities, renewable energy initiatives and river development programmes.
The issue process occurs through private placements using the Electronic Bidding Platform (EBP) of the NSE and BSE. Following issuance, these bonds are listed on both the exchanges, enabling secondary market trading. Tenures span three, five, seven or 10 years, with bonds providing semi-annual coupon payments. Interest earnings from these bonds are subject to taxation according to individual investor tax brackets, with no additional tax incentives currently available.
Credit considerations
Coupon rates for municipal bonds have historically been set 100 to 200 basis points above prevailing yields on central government securities of similar tenors, with variations based on credit ratings. The recently issued Greater Chennai Corporation (GCC) bonds, carrying an AA+ rating, offered a coupon rate of 7.97 per cent, while Agra Nagar Nigam bonds with an AA rating provided 8.15 per cent. Earlier issuances of Greater Visakhapatnam and Bhopal bonds from 2018 offered 10 per cent and 9.55 per cent respectively.
The credit profile of issuers is a crucial consideration for investors. Ministry of Housing and Urban Affairs data indicate that 162 out of 468 rated cities have achieved Investible Grade Ratings of B- and above, within 34 cities securing ratings of A- or higher. Cities including Pune, Ahmedabad, Pimpri Chinchwad, Surat, and GCC have attained AA+ ratings, while Indore, Vadodara, Lucknow, Visakhapatnam, and Bhopal hold AA ratings. Hyderabad’s municipal bonds carry an AA- rating.
Lower face value
Historically, high face value of ₹10 lakh limited retail investor access to municipal bonds. However, SEBI’s 2022 directive reducing minimum face value for privately placed corporate bonds to ₹1,00,000 began shifting market dynamics. A notable milestone was in February 2023 when Indore Municipal Corporation launched green municipal bonds with a face value of just ₹1,000, structured into four separately transferable and redeemable principal parts (STRPPs) of ₹250 each, offering an 8.25 per cent annual coupon rate with semi-annual payments. SEBI subsequently reduced face value for debt securities issued through private placements to ₹10,000, adding to accessibility for individual investors.
Points to note
Urban local bodies in India frequently face chronic fiscal imbalances due to dependence on volatile revenue sources such as property taxes and user charges and make do with government grants.
The ICRA report highlights that since FY18, all municipal bond issuances have incorporated strong structured payment frameworks, helping secure high credit ratings typically in the AA category despite varying financial profiles. The recent GCC municipal bond issue exemplifies this approach, backed by an escrow mechanism linked to property tax revenues from specific zones and a ₹14.04 crore Project Sustainability Grant Fund. This layered payment structure supported dual Provisional AA+/Stable ratings from both India Ratings and Acuité Ratings.
Indian municipal bonds lack sovereign guarantees. No defaults have occurred to date. But financial risks persist due to weak fiscal positions of many urban local bodies. The government encourages municipal bond issuance through reform-linked incentives under schemes like AMRUT 2.0, offering up to ₹26 crore for regular bonds and ₹20 crore for green bonds per ₹100 crore issued (only for second issue). Industry sources indicate these incentives reduce borrowing costs by 1.5–2 per cent while mandating credit ratings for urban local bodies, making bonds a more cost-effective financing option.
Liquidity concerns
ICRA anticipates that over 10 urban local bodies, including Prayagraj and Varanasi, may issue municipal bonds soon. For entities with lower credit quality, State governments are expected to issue pooled municipal bonds through special purpose Vehicles (SPVs) by combining requirements from different cities and towns.
Municipal bonds are listed and traded on NSE and BSE, though trading activity remains limited. In March 2025, NSE introduced a dedicated platform at indiamunicipalbonds.com, currently listing 53 municipal bonds with face values of ₹250, ₹1,00,000, ₹1,42,600, and ₹1,42,900. Total trading volume for calendar year 2025 reached just ₹56 crore, with Agra Nagar Nigam accounting for ₹36 crore. NSE has also launched India’s first Municipal Bond Index comprising 28 bond issues.
Despite recent progress, municipal bonds remain unsuitable for retail investors due to their uneven credit risk profiles and low trading volumes that lead to poor liquidity. Understanding the creditworthiness of issuing entities is also challenging. With no sovereign guarantees, credit risk can also play out. But one may expect the State government to step in if there are any financial difficulties. These limitations make municipal bonds unsuitable for small investors seeking capital protection, easy exit options, and stable income at this stage.
