Budget 2025 Proposes Major Reforms to Strengthen India's Corporate Bond Market
In a significant move aimed at deepening India's corporate debt market, Finance Minister Nirmala Sitharaman unveiled a fresh set of initiatives during the budget presentation. The proposals include the introduction of Total Return Swaps (TRS) on corporate bonds and a substantial incentive scheme to encourage municipalities to raise funds through bond issuances. These measures represent a strategic shift in how investors can gain exposure to corporate credit, according to treasury officials familiar with the developments.
Understanding Total Return Swaps (TRS) Mechanism
The proposed Total Return Swaps mechanism allows investors to receive the complete economic return of a corporate bond, encompassing both coupon income and price movements, without actually owning the underlying security. Instead, a bank or intermediary holds the bond and passes on the total return to the investor in exchange for a funding cost and margin. This innovative structure enables market participants to express views on bond price or yield movements without direct ownership.
Market participants emphasize that TRS is primarily about expressing short-term or directional views on credit rather than earning carry - the difference between bond income and financing costs. While this structure has been widely utilized in government securities markets overseas and selectively for Indian bonds by offshore investors, its formal introduction in India's corporate bond market marks a progressive step toward expanding trading activity and enhancing price discovery mechanisms.
Potential Impact and Market Perspectives
However, treasury officials caution that TRS is unlikely to generate permanent, long-term demand for corporate bonds. "Typically, TRS doesn't create permanent demand – it generates trading demand," explained a senior treasury official at a private sector bank. "I don't see significant domestic usage initially because we lack that kind of investment ecosystem in India. Foreign investors might participate temporarily, but substantial pickup may take time. Previously, there was limited ability to express views on corporate bonds, so this move represents meaningful progress."
Market analysts suggest that TRS may prove particularly relevant for foreign investors and high-yield or private credit players seeking leveraged exposure, rather than domestic mutual funds or traditional buy-and-hold investors. The budget also proposes a market-making framework with appropriate access to funds and derivatives on corporate bond indices, which experts believe could enhance secondary market liquidity once implementation details are clarified.
"Small policy moves for the bond market such as the market-making framework will enhance liquidity in the secondary market," noted Vishal Goenka, co-founder of IndiaBonds.com. "The introduction of bond indices will bring greater transparency for pricing and hedging credit risk, creating a more robust market infrastructure."
Municipal Bond Market Gets Major Boost
In parallel developments, the budget has turned significant attention toward municipal bonds, announcing targeted incentives to encourage large-scale issuances by urban local bodies. Finance Minister Sitharaman specifically proposed a ₹100 crore incentive for single bond issuances exceeding ₹1,000 crore, while maintaining the existing AMRUT (Atal Mission for Rejuvenation and Urban Transformation) scheme that supports smaller issuances up to ₹200 crore for medium and smaller towns.
Experts believe this incentive could substantially reduce borrowing costs for large municipalities, potentially lowering funding expenses by up to 100 basis points for ten-year bonds. "The incentive will improve the funding cost of municipalities, which otherwise have seen higher funding costs compared to state government bonds," explained Anil Gupta, senior vice president and co-group head of financial sector ratings at ICRA. "Depending on bond tenor, annual benefits can vary significantly, making municipal bonds more attractive financing instruments."
Growing Traction in Municipal Bond Market
The municipal bond market, though relatively small, has demonstrated encouraging growth signals. According to a CareEdge Ratings report dated January 13, municipalities raised approximately ₹1,000 crore through corporate bonds during April-November 2025. For fiscal year 2026, municipal bond issuances are projected to reach around ₹2,000 crore – a notable increase compared to the cumulative ₹3,000 crore raised over seven years from 2018 to 2025.
Market participants anticipate that major municipal corporations including Surat, Indore, and Nagpur could benefit substantially from these new incentives. The combined effect of TRS introduction and municipal bond incentives represents a comprehensive approach to strengthening India's corporate debt ecosystem, potentially attracting diverse investor participation while supporting urban infrastructure development through more efficient financing mechanisms.
