The Reserve Bank of India (RBI) has announced that municipal debt securities will now be treated as eligible collateral in repo transactions, according to its latest master circular. The move enables banks and financial institutions to borrow or lend funds using municipal bonds as security, marking a key step toward improving liquidity and participation in the municipal bond market.
Key Changes
Under the revised framework, municipal bonds have been added to the list of eligible instruments for repurchase (repo) transactions, alongside government securities and corporate bonds. The inclusion aims to deepen the secondary market for municipal debt and make the segment more attractive to institutional investors.
Implications for Local Government Borrowing
The RBI’s decision is expected to enhance liquidity and lower borrowing costs for urban local bodies (ULBs) that issue municipal bonds to finance infrastructure and smart city projects. Increased demand from banks and financial institutions could help municipalities access capital more efficiently.
Municipal bonds are issued by local government entities to fund public infrastructure projects such as roads, water supply systems, sewage networks, and affordable housing.
Sector Challenges
Despite their potential, the municipal bond market in India has faced challenges due to weak financial positions of ULBs and limited investor participation. According to an SBI Research report (April 2025), municipal bonds have not performed satisfactorily under the Smart City Mission, citing heavy dependence on government grants and modest revenue receipts—just 0.6% of GDP in FY24, compared to 9.2% and 14.6% for the Central and State governments, respectively.
Summary
The RBI’s inclusion of municipal bonds as repo-eligible collateral expands the scope of the money market framework, potentially improving liquidity, transparency, and financing access for India’s urban infrastructure sector.
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