The Securities and Exchange Board of India (Sebi) and the Reserve Bank of India (RBI), the bond market regulators in India, and the government have been taking various steps to strengthen the country’s bond market. In continuation of these steps, Finance Minister Nirmala Sitharaman announced new measures in the Union Budget 2026 to strengthen the bond market further and encourage more investors to participate.
Let us understand some of these announcements.
Market-making framework, total return swaps on corporate bonds
The government will introduce a market-making framework to improve liquidity in the corporate bond market. The market making is done by intermediaries that provide buy and sell quotes for bond market securities.
In a market with limited liquidity, a buyer faces difficulty in getting a seller and vice versa. Even if a buyer finds a seller, there may be a significant difference (spread) between the fair price and the price being offered for the trade. The presence of market makers helps buyers find sellers and narrow the bid-ask spread.
The market-making framework will address the liquidity challenge facing India’s bond market. Market makers will help improve liquidity and better price discovery. The presence of market makers will encourage more investors to participate, thereby growing the overall bond market.
The government will introduce total return swaps on corporate bonds. A total return swap is a derivative instrument that allows the receiver to benefit from the bond’s coupon payments and capital gain without owning the bond. Total return swaps are a risk management tool that will enhance liquidity in the corporate bond market by encouraging participation from new participants.
During her Budget 2026 speech, the finance minister said: “I propose to introduce a market-making framework with suitable access to funds and derivatives on corporate bond indices. I also propose to introduce total return swaps on corporate bonds.”
Incentives for municipal bonds
The finance minister announced that the government will provide an incentive of ₹100 crore for a single bond issuance exceeding ₹1,000 crore by a municipal corporation. The measure will encourage larger issuances of municipal bonds. The incentive will encourage more municipal corporations to come out with bond issues of more than ₹1,000 crore to take advantage of the incentive being offered. It will deepen the debt market for municipal bonds and bring in more investors.
Apart from the new incentive announced in Budget 2026, the existing incentive scheme will continue. The existing scheme under Atal Mission for Rejuvenation and Urban Transformation (AMRUT) incentivises municipal bond issuances of up to ₹200 crore.
The existing scheme will continue to support smaller and medium towns. The new scheme will encourage municipal corporations of large cities to come out with larger municipal bond issues (exceeding ₹1,000 crore).
The larger municipal bond issues will help finance important infrastructure projects in cities that will have a positive impact on the quality of life of the residents. Some of these infrastructure projects focus on creating sustainable urban spaces, providing tap water to residents, installing sewage treatment plants, creating green spaces, promoting non-motorised transport, and rejuvenating water bodies, among others.
The budget announcement is the government’s commitment towards developing the municipal bond market. The incentive will help local bodies in improving access to capital markets through bond issuances. The resources raised can be deployed for developing urban infrastructure and related projects.
During her Budget 2026 speech, the finance minister said: “To encourage the issuance of municipal bonds of higher value by large cities, I propose an incentive of ₹100 crore for a single bond issuance of more than ₹1,000 crore. The current scheme under AMRUT, which incentivises issuances up to ₹200 crore, will also continue to support smaller and medium towns.”
Budget 2026 measures to open new funding channels
The Budget 2026 measures will open new funding channels for bond issuers. Corporates and municipal corporations will be able to raise more funds from the bond markets. It will ease some pressure on banks that are currently funding a lot of infrastructure and other projects. The Budget 2026 measures will broaden participation in the bond markets, improve liquidity, reduce bid-ask spreads, and lead to better price discovery.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.
