RBI Includes Municipal Bonds as Eligible Collateral in Repo Transactions

The Reserve Bank of India (RBI) has announced that municipal debt securities will now be eligible collateral in repo transactions, according to its latest master circular. The inclusion allows banks to borrow or lend money using municipal bonds as security, potentially improving liquidity in the segment and lowering borrowing costs for local infrastructure projects.

Key Change in Repo Framework

Under the new guideline, banks and financial institutions can use municipal bonds as collateral in repurchase (repo) transactions. This effectively integrates municipal debt securities into the broader money market framework, placing them alongside other eligible instruments such as government securities and corporate bonds.

The move is expected to enhance the attractiveness and tradability of municipal bonds, which have historically seen limited participation due to lower liquidity and lack of secondary market depth.

Impact on Local Government Borrowing

Allowing municipal bonds in repo transactions could help urban local bodies (ULBs) raise funds more efficiently for state-led infrastructure and smart city projects. The change may lead to lower borrowing costs as demand for municipal securities rises among banks and institutional investors.

Municipal bonds are debt instruments issued by local government entities to finance public infrastructure such as water supply systems, roads, sewage networks, and housing projects. Investors who buy these bonds effectively lend money to municipalities in return for periodic interest payments.

Challenges and Fiscal Constraints

Despite their potential, municipal bonds in India have struggled to gain momentum due to the weak financial position of many local bodies.

An SBI Research report published in April 2025 noted, “Municipal bonds have failed to perform satisfactorily under the smart city mission due to financial constraints of urban local bodies and overreliance on government grants. Despite significant responsibilities, municipal corporations’ revenue receipts are quite modest (0.6% of GDP in FY24) and pale in comparison to those of Central and State governments (9.2% and 14.6% of GDP in FY24, respectively).”

Read More: How to File a Complaint with RBI's CMS Portal.

Conclusion

By permitting the use of municipal bonds as collateral in repo transactions, the RBI has taken a key step toward strengthening the municipal finance ecosystem. The change is expected to support liquidity, improve investor participation, and encourage greater capital market access for local governments undertaking infrastructure development.

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