The government laid out a fresh set of initiatives in the budget aimed at deepening India’s corporate bond market, with finance minister Nirmala Sitharaman proposing the introduction of total return swaps (TRS) on the bonds and an incentive for municipalities to help them raise funds.
The plan marks a significant shift in how investors can take exposure to corporate credit, three treasury officials said. With TRS, an investor can receive the entire economic return of a bond, including coupon income and price movements, without owning the bond outright.
Instead, the bond is held by a bank or intermediary, which passes on the total return to the investor in exchange for a funding cost and margin. Investors can take a view on price or yield movement in a bond without actually buying it.
Market participants said TRS is less about earning carry (the difference between the income the bond generates and the cost of financing the position) and more about expressing short-term or directional views on credit. The structure has been widely used in government securities overseas and selectively for Indian bonds by offshore investors.
The proposed introduction in the corporate bond market is seen as a step towards expanding trading activity and price discovery. However, treasury officials said TRS is unlikely to create sticky, long-term demand for corporate bonds.
“Typically, TRS doesn’t generate permanent demand – it generates trading demand. I don’t see any domestic usage really because we don’t have that kind of investment in India. There may be foreigners and they might come and trade for some time, but I don’t really see it picking up much,” a senior treasury official at a private sector bank said. “Earlier, there was no way to express a view on corporate bonds, but this move will help to some extent.”
This move may be more relevant and beneficial for foreign investors and high-yield or private credit players looking to take leveraged exposure, rather than for domestic mutual funds or traditional buy-and-hold investors, market participants said.
Sitharaman also proposed to introduce a market-making framework with suitable access to funds and derivatives on corporate bond indices. While this could be a good move directionally, market participants are awaiting the key details to fully understand its impact.
“Small policy moves for the bond market such as the market-making framework will enhance liquidity in the secondary market and introduction of bond indices will bring in more transparency for pricing and hedging credit risk,” said Vishal Goenka, co-founder of IndiaBonds.com.
Municipal bond push
The budget turned its focus to municipal bonds, announcing a targeted incentive to encourage large issuances by urban local bodies.
“…I propose an incentive of ₹100 crore for a single bond issuance of more than ₹1,000 crore. The current scheme under AMRUT (Atal Mission for Rejuvenation and Urban Transformation) which incentivizes issuances up to ₹200 crore, will also continue to support smaller and medium towns,” Sitharaman said in her budget speech.
Experts said the incentive could materially lower borrowing costs for large municipalities and push them to tap the corporate bond market with big-ticket issuances.
“The incentive will improve the funding cost of municipalities, which otherwise have seen higher funding cost compared to state government bonds. Depending on the tenor of the bonds, the annual benefit can vary. For example, a 10-year bond can reduce funding cost by 100 bps,” said Anil Gupta, senior vice president and co-group head, financial sector ratings, at ICRA.
The push comes as the municipal bond market, though still small, has shown signs of traction. During April-November 2025, municipalities raised ₹1,000 crore through corporate bonds, according to a report by CareEdge Ratings dated 13 January.
For FY26, municipal bond issuances are expected to reach about ₹2,000 crore, which compares favourably with the cumulative issuances of ₹3,000 crore raised over seven years from 2018 to 2025, the rating company said in a report.
Market participants expect big municipal corporations such as Surat, Indore and Nagpur to benefit from this move.
