Union budget provides big boost to corporate, municipal bond market

NEW DELHI: Finance minister Nirmala Sitharaman’s Budget 2026 is set to provide a big fillip to India’s bond market, with proposals aimed at improving liquidity, expanding risk-hedging tools and encouraging large municipal bond issuances.

The finance minister said the government will introduce a market-making framework for corporate bonds, alongside improved access to funding and derivatives based on corporate bond indices. The measures are intended to deepen liquidity and trading in a market that remains shallow compared with equities and bank lending. As part of this push, the Budget also proposes the introduction of total return swaps on corporate bonds, a derivative instrument that allows investors to gain exposure to bond returns without owning the underlying securities, aiding risk management and broadening participation.




To boost urban infrastructure financing, the Budget has proposed an incentive of Rs 100 crore for a single bond issuance of over Rs 1,000 crore by a municipal corporation. The move targets large cities with sizeable budgets, led by Mumbai with an outlay of Rs 74,427 crore, followed by Bengaluru at Rs 19,930 crore and Delhi at Rs 17,044 crore. Ahmedabad has a budget of Rs 15,502 crore, while Pune has allocated Rs 12,618 crore.

The AMRUT 2.0 scheme, under which small municipal corporations (ULBs) receive up to Rs13 crore interest subvention per Rs 100 crore of first bond issuance (max Rs 26 crore), and ₹10 crore per Rs 100 crore for subsequent green bonds (max Rs20 crore), will continue.

The initiatives seek to address long-standing liquidity constraints in the corporate bond market, where daily secondary trading volumes remain modest. Market making is expected to narrow bid-ask spreads and support continuous trading, while index-based derivatives and swaps could attract long-term investors such as insurers and pension funds that face investment restrictions in lower-rated paper.

For municipal bodies, the incentive is expected to lower borrowing costs and scale up bond issuance, building on earlier successes in the municipal bond market.