Finance Minister Nirmala Sitharaman last year announced a strategy to encourage cities to enhance their creditworthiness, enabling them to issue municipal bonds. However, experts in the debt market, anticipating the upcoming Interim Budget, believe that considerable efforts are still needed to foster the development of this market, as the number of issuance has not experienced a substantial increase.
Following the minister’s announcement, certain market participants had expected a significant borrowing trend among municipal corporations from the debt market, but such a scenario did not materialise with Pimpri Chinchwad Municipal Corporation being the only notable issuer in 2023.
Sunil Kumar Sinha, senior director at India Ratings & Research says there is still a long journey for the market to develop in India. “A major challenge for most of these municipal bodies is that their credit accounting is not up to the corporate standard, and because of that they do not have ratings attractive enough to gain investor’s interest. Therefore, there is a room for better transparency to increase investor participation for these instruments,” he added. Many investors such as banks, insurance companies, and pension funds have a mandate to invest in debt rated “AA” or above, a criteria that most of the municipal bodies in India are unable to meet.
Why Municipal Bonds are important?
A municipal bond is a financial instrument issued by corporations in accordance with municipal laws, after granted permission by the respective state governments. The capital generated through these bonds is allocated to fund projects aimed at socioeconomic development.
In November 2022, a report from the Reserve Bank of India (RBI) highlighted that an underdeveloped municipal bond market is creating challenges for local bodies to address their resource gaps. This situation is compelling them to depend on loans from the central and state governments, as well as borrowings from banks and financial institutions.
The inaugural report on municipal finances from the regulator suggests that listing such bonds on stock exchanges can potentially develop the vital secondary market for these bonds in India.
What is the Expectation in 2024?
For the coming budget, debt market participants anticipate that the government will extend its emphasis on further developing the municipal bond market. “By this time the government should realise that unless they do not provide proper incentives to the investors for subscribing to these issues, they cannot hope for the market to develop just by the municipal bodies,” says a chief investment officer at a mutual fund house, on conditions of anonymity.
Nevertheless, the final budget will be presented only after the Lok Sabha elections, ruling out the possibility of major announcements, as suggested by the Finance Minister herself. During an election year, the government typically introduces either an interim budget or requests a vote on account. The practice is to defer the presentation of the full budget to the next government.
Yet, the market is hopeful that the government will consider providing additional measures in the Interim budget to deepen the corporate bond market in India given the scope of its contribution to India’s development.