Municipal Bond now eligible security for repo, reverse repo transactions
The Finance Ministry has permitted using municipal bonds as a security for repo and reverse repo transactions, paving the way for municipal bodies to raise funds for infrastructure projects. By making these bonds acceptable collateral for short-term borrowing, 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. 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, 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 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 thereunder, to be as security under this section for the purposes of ‘repo’ and ‘reverse repo’,“ the Finance Ministry notification said. SEBI data showed, as on September 30, over ₹3,300 crore has been raised through municipal bonds.
“The inclusion of Municipal Debt Securities for repo and reverse repo will assist in expanding 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 who engage in repo and reverse repo transactions, this allows diversification into new asset class which could potentially provide better returns than most of the other eligible securities for repo and reverse repo transactions.
“Though Municipal Debt Securities are generally secured or carry some form of State/Central Government guarantee/backing, one cannot completely ignore the possibility of a higher default risk attached to such securities.” Asher cautioned.
A report by ICRA on the ‘Indian Municipal Bond Market’ estimated that more than 10 issuances in FY25/FY26 would raise funds in excess of ₹ 1,500 crore. However, this remains negligible relative to the size of Central/state Government issuance. “In ICRA’s view, persistent challenges such as improvement in the ULBs’ 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 FY2018, the GoI initiated an incentive scheme ( ~₹13 crore for every ₹100-crore bond issuance), providing impetus to Urban Local Bodies (ULBs) in using this mode of finance.
However, the key deterrents observed have been high dependence on government grants by the ULBs, lack of adequate and timely financial disclosures, illiquidity and absence of a secondary market for bonds, high compliance requirements, and relatively weak credit quality of the ULBs to access capital markets.
Published on October 26, 2025
