The Ministry of Finance has allowed the use of municipal bonds as collateral for repo and reverse repo transactions, paving the way for municipal agencies to raise money for infrastructure projects. By making these bonds acceptable as collateral for short-term loans, the government has opened the door for banks, mutual funds, insurers and companies to invest in them, creating a new asset class.
Experts say this will expand the investor base for such securities, creating more demand and liquidity. Until now, municipal bonds have remained largely illiquid because they are held by a small group of long-term investors, such as pension or ESG funds. By allowing their use in repo markets, where banks, mutual funds, insurance funds and listed companies lend and borrow against collateral, the government has opened the door for a wider range of financial participants to invest in these securities.
“The Central Government hereby specifies that the Municipal Debt Securities with the meaning assigned to them in the Securities and Exchange Board of India Act, 1992 or any rules or regulations made thereunder shall be deemed to be security under this section for the purposes of ‘repo’ and ‘reverse repo’,” the Finance Ministry notification said. SEBI data showed that over ₹3,300 crore had been raised through municipal bonds as of September 30.
“The inclusion of municipal debt securities for repos and reverse repos will help expand the investor base for such securities and create more demand and liquidity for such securities,” said Hemen Asher, partner at Bhuta Shah & Co LLPs.
From the perspective of participants engaged in repo and reverse repo transactions, this allows diversification into a new asset class that could potentially deliver better returns than most other eligible securities for repo and reverse repo transactions.
“While municipal debt securities are generally backed or have some form of state/central government guarantee/backing, one cannot completely ignore the possibility of higher default risk associated with such securities.” Asher warned.
An ICRA report on the ‘Indian Municipal Bond Market’ estimated that over ten issues would raise funds of over ₹1,500 crore in FY25/FY26. However, this remains negligible compared to the size of central government emissions. “As per ICRA’s view, persistent issues such as improvement in ULBs’ own credit quality and lack of adequate disclosure and information systems would remain critical for a healthy municipal bond market in India,” the report said.
It was further highlighted that the key factors driving traction in the Indian municipal bond market can be attributed to government and regulatory actions. In 2015, the SEBI (Issuance and Listing of Debt Securities by Municipalities) Regulations were issued, defining the status of bonds, thereby attracting investor interest. Subsequently, in FY 2018, the Government of India initiated an incentive scheme (~₹13 crore for every ₹100 crore bond issue), which gave an impetus to Urban Local Bodies (ULBs) in adopting this mode of financing.
However, the main perceived deterrents are the high dependence on government subsidies by the ULBs, the lack of adequate and timely financial disclosures, the illiquidity and absence of a secondary market for bonds, high compliance requirements and the relatively weak credit quality of the ULBs to access the capital markets.
Published on October 26, 2025
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