The Indian municipal bond market remains in a nascent stage, with the total municipal bonds outstanding at ₹4,204 crore being just 0.09 per cent of the total corporate bonds outstanding as of March-end 2024, according to a RBI report.

“Most municipal bonds are privately placed with select investors, limiting the investor base. Ahmedabad (in 1998 and 2019) and Indore (in 2023) offered public bond issues,” per the central bank’s report on municipal finances.

The report opined that an improvement in the financial performance and credit ratings of the MCs (municipal corporations) is critical for promoting investor confidence and broadening market participation.

Credit rating agencies have rated the MCs – Ahmedabad, Ghaziabad, Greater Hyderabad, Greater Visakhapatnam, Indore, Lucknow, Bhopal, Pimpri Chinchwad, Pune, Surat, and Vadodara -- as investment grade so far.

At ₹4,204 crore (as on March 31, 2024), the outstanding municipal bonds stood at 0.01 per cent of GDP as compared with ₹1,100 crore as on March 31, 2005 (0.03 per cent of GDP).

“All the bonds issued since 2016-17 are taxable, unlike the initial development phase. The coupon rates on municipal bonds have generally moved in tandem with those on Central government bonds in recent years,” the report said.

Municipal bonds delivered an average return of 8.5 per cent during 2023-24, as compared with 8.3 per cent and 7.3 per cent on the NIFTY Medium Duration G-Sec Index and NIFTY AAA Medium Duration Corporate Bond Index, respectively.

Green municipal bonds

Municipal bond financing has seen some recovery in recent years, the report said, adding MCs are also venturing into green municipal bonds to fund environmentally beneficial projects, marking a pivotal move towards sustainable urban development.

The report, which has been put together by officials of RBI’s Department of Economic and Policy Research, noted that amidst increasing awareness about climate-related risks, local bodies have started issuing green bonds to finance projects with positive environmental impacts.

The issuance of municipal green bonds began in the United States in 2014, followed by similar initiatives by cities and municipalities in Europe.

In India, municipal green bond issuance started in 2021, when Ghaziabad Nagar Nigam raised bonds worth ₹150 crore for setting up a tertiary water treatment plant. This was followed by Indore in 2023 and Ahmedabad and Vadodara in 2024. Municipal green bonds worth ₹694 crore have been raised in 4 years for different green projects, RBI officials said,

The officals observed that the market for green municipal bonds is still at a nascent stage and the process of issuing a green bond involves additional costs for green audits and monitoring key performance indicators. As the market matures and expands, these costs are expected to come down, they added.

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