FY 2026-27 budget proposed Total Return Swaps and incentives for Municipal Bonds to deepen India’s corporate debt market, aiming to boost liquidity and lower borrowing costs; long-term investor demand likely to remain limited.
The government budget for FY 2026-27 has unveiled a new set of measures to further build India’s corporate bond market with the finance minister Nirmala Sitharaman proposing the introduction of Total Return Swaps (TRS) on bonds, and incentives to push municipal body participation in the sector. These initiatives are aimed at boosting liquidity, expanding investor participation, and encouraging greater use of market-based funding by urban local bodies.
India’s bond market is one of the least explored when compared to other major economies. Finance minister Nirmala Sitharaman said the proposals are designed to broaden access to corporate credit and strengthen price discovery in the secondary market.
Total Return Swaps (TRS)
The introduction of total return swaps (TRS) on bonds would allow investors to gain exposure to the full economic return of a bond, including coupon income and price movements, without owning the underlying security. This means that investors can now take a view on the price and yield movements even when the ownership lies with banks or intermediaries. In return, the intermediaries charge a nominal funding cost and margin. Investors earn the carry – the difference between the income generated by the bond and the cost spent to finance the investor’s position. Market analysts view this move as more of the government’s attempt to increase investor participation to take a directional view on credit rather than the incentive to earn the carry.
On the flip side, treasury officials cautioned that while TRS could expand trading volumes and improve price discovery, they are unlikely to create sticky, long-term demand for corporate bonds.
“Typically, TRS doesn’t generate permanent demand – it generates trading demand,” said a senior treasury official, adding that domestic institutional participation may remain limited due to the lack of appetite for leveraged credit exposure.
Market experts also comment that such a move would benefit foreign investors and high-yield or private credit players more instead of domestic mutual funds and traditional investors.
Municipal Bonds Incentives
The Budget also sharpened its focus on municipal bonds, announcing targeted incentives to encourage larger issuances by urban local bodies. The finance minister in her budget speech quoted, “I propose an incentive of ₹100 crore for a single bond issuance of more than ₹1000 crores.” She also mentioned that the ongoing AMRUT (Atal Mission for Rejuvenation and Urban Transformation) scheme incentivizing issuances up to ₹200 crore will continue alongside to support smaller towns.
What does this entail?
This move has come at a time when the municipal bond market is gaining ground, though still small in volume. Between April and November 2025, municipalities raised ₹1,000 crore through corporate bond issuances, according to CareEdge Ratings.
Experts are of the view that these incentives could potentially lower borrowing costs for large municipalities and encourage them to turn towards the corporate bond market for large fundings. Issuances are expected to reach around ₹2,000 crore in FY26, comparing favorably with the cumulative ₹3,000 crore raised over the seven-year period from 2018 to 2025. Large municipal corporations such as Surat, Indore, and Nagpur are expected to be among the key beneficiaries of the policy push.
What’s ahead?
Overall, the Budget outlines a gradual, structural approach to strengthening India’s corporate and municipal bond markets through new instruments, incentives, and market-making frameworks.
While participants welcomed the direction of policy, many said the eventual impact would depend on execution details and regulatory clarity. For now, the measures are viewed as incremental but meaningful steps towards improving liquidity, price discovery, and credit access in India’s bond market.
