Deploy municipal bonds to give urban India the makeover it needs—Here’s how to attract investors

In the words of the 16th Finance Commission, “Cities concentrate resources, including physical and human capital, infrastructure and civil amenities, thereby fostering consumption, innovation and employment opportunities.” But unless cities have proper mobility, water, sanitation, clean air, living spaces, amenities and governance, India’s urban rush will only result in glorified slums.

Urban Local Bodies (ULBs), which must create the ecosystem needed to nurture the orderly growth of these modern habitats, claim they lack the resources required to set up state-of-the-art infra.

The truth is more nuanced.

Most ULBs are reluctant to tap the most obvious sources of local revenue: property taxes and user charges. They prefer to depend on state or central transfers.

This is where municipal bonds, or munis, come in. These are debt instruments issued by cities to fund day-to-day obligations and finance projects like educational, transit or sewerage systems.

Munis are not new to India. The first were issued by Bengaluru in 1997. But the market for these bonds has stayed lacklustre. Government programmes like the Atal Mission for Rejuvenation and Urban Transformation (Amrut) and Smart Cities Mission are yet to move the needle on munis.

According to a September 2025 paper put out by the Securities and Exchange Board of India (Sebi), only 29 municipal corporations had issued bonds totalling ₹4,240.3 crore with tenors ranging from four to 10 years and interest rates in a range from 7.59% to 10.23%.

Part of the reason is the low credibility of our ULBs. Given Sebi’s 2015 guidelines, only munis with a credit rating of BBB and above from a top credit rating agency in India can be issued to the public. The underlying logic, to improve confidence in these instruments, cannot be faulted. The problem is that most ULBs are either unrated or below investment grade.

One way to improve muni offtake is to ensure they are backed by ring-fenced cash flows that are deposited into escrow accounts. These can then be supported by security mechanisms like debt service or sinking fund accounts and interest payment accounts.

A structured ‘waterfall’ for prioritized debt servicing would enable bond issuances to get better credit ratings even when municipal finances are modest. Efforts by the ministry of housing and urban affairs to strengthen the ecosystem through incentives should also help. Under Amrut 2.0, for instance, ULBs can receive ₹13 crore per ₹100 crore raised (up to ₹26 crore) as grant support.

For those seeking a second round, the bonds must qualify as ‘green’ under Sebi’s framework for non-convertible securities and the funds raised should be used for climate-aligned sectors like water, sanitation, renewable energy and urban resilience.

The opportunities are huge; as is the need for funds. While the market for munis is largely untapped, for institutional investors like pension funds and insurers looking to park long-term funds, they are an obvious answer. It is now for ULBs to turn to them and strike two birds with one stone: get much-needed funds and provide urban residents with sorely-needed infrastructure.