The current scheme under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), which incentivises issuances up to ₹200 crore, will also continue to support smaller and medium towns, said Union Finance Minister Nirmala Sitharaman in her budget speech.
The move to incentivise issuance of municipal bonds of higher value by large cities comes in the wake of Reserve Bank of India’s own effort to breathe new life into these bonds.
In November 2025, the RBI notified municipal bonds as eligible collateral for repo transactions. The central bank then noted that this measure would help improve the liquidity of such securities and provide a fillip to the market for municipal bonds while also adding to the suite of instruments available for the repo and reverse repo markets.
Venkatakrishnan Srinivasan, Founder & Managing Partner, Rockfort Fincap LLP, observed that by offering ₹100 crore for a single municipal bond issuance exceeding ₹1,000 crore, the Budget pushes municipalities beyond incremental, sub-₹250 crore tranches towards benchmark-sized issuances.
Unlike AMRUT incentives, which are capped at the ULB (urban local body) level and linked to reform milestones, the Budget incentive explicitly rewards size, aggregation and market depth.
“Taken together, the two frameworks are complementary. AMRUT 2.0 lowers the entry barrier and promotes reform, while Budget FY2027 rewards scale and consolidation. For financially strong and cash-generating municipalities, the combined impact of these incentives can materially reduce the effective cost of borrowing, in some cases bringing it below 5.5 per cent—potentially cheaper than long-tenor State government borrowing routed through the RBI,” per Venkatkrishnan’s assessment.
He emphasised that this layered incentive structure represents the most comprehensive fiscal support for municipal bonds so far and signals a clear policy shift: from encouraging experimentation to enabling municipal bonds to emerge as a mainstream, scalable source of urban infrastructure finance.
Published on February 1, 2026
