Finance Minister Nirmala Sitharaman's Budget 2026 is poised to deliver a significant boost to India's bond market, with a series of strategic proposals designed to enhance liquidity, expand risk-hedging tools, and encourage substantial municipal bond issuances. The government's focus is on deepening a market that has historically remained shallow compared to equities and traditional bank lending, aiming to attract broader investor participation and improve overall financial stability.
Key Initiatives for Corporate Bond Market Development
The Budget outlines a comprehensive market-making framework for corporate bonds, which is expected to improve access to funding and introduce derivatives based on corporate bond indices. This move is specifically targeted at addressing long-standing liquidity constraints, where daily secondary trading volumes have remained modest. By narrowing bid-ask spreads and supporting continuous trading, market making is anticipated to create a more vibrant and efficient marketplace.
Introduction of Total Return Swaps
As part of this push, the Budget proposes the introduction of total return swaps on corporate bonds. This derivative instrument allows investors to gain exposure to bond returns without owning the underlying securities, thereby aiding in risk management and broadening participation. Such tools are likely to attract long-term investors, including insurers and pension funds, which often face investment restrictions in lower-rated paper, thus injecting more capital into the market.
Incentives for Municipal Bond Issuances
To boost urban infrastructure financing, the Budget has proposed a substantial incentive of Rs 100 crore for a single bond issuance exceeding Rs 1,000 crore by a municipal corporation. This initiative targets large cities with significant budgets, such as Mumbai with an outlay of Rs 74,427 crore, followed by Bengaluru at Rs 19,930 crore, Delhi at Rs 17,044 crore, Ahmedabad at Rs 15,502 crore, and Pune at Rs 12,618 crore. The goal is to lower borrowing costs and scale up bond issuance, building on earlier successes in the municipal bond market.
Continuation of AMRUT 2.0 Scheme
The AMRUT 2.0 scheme will continue to support small municipal corporations (ULBs), offering up to Rs 13 crore in interest subvention per Rs 100 crore of first bond issuance, with a maximum of Rs 26 crore. For subsequent green bonds, the incentive is Rs 10 crore per Rs 100 crore, capped at Rs 20 crore. This ongoing support aims to foster sustainable urban development and encourage more municipalities to tap into the bond market for funding.
Expected Impact and Market Response
The combined measures are set to transform India's bond landscape by:
- Enhancing liquidity and trading depth in the corporate bond market.
- Providing sophisticated risk-hedging tools like index-based derivatives and swaps.
- Incentivizing large-scale municipal bond issuances to fund critical urban infrastructure projects.
- Attracting a diverse range of investors, from institutional players to long-term funds.
By addressing key challenges such as liquidity constraints and high borrowing costs, Budget 2026 aims to create a more robust and inclusive financial ecosystem, ultimately supporting India's economic growth and urban development goals.
