Budget 2026: Finance Minister Announces Several Incentives For Bond Market - Here's What It Means

Sitharaman said, "I propose to introduce a market making framework with suitable access to funds and derivatives on corporate bond indices." Sitharaman also announced the introduction of total return swaps on corporate bonds.

An efficient market-making framework for the corporate bond market could help boost liquidity in corporate bonds and help in effective price discovery on bonds and bond derivatives, market analysts said. A proper market-making framework will also reduce transaction costs for investors on entry and exit from the market, they said.

“By incentivising market makers to provide continuous quotes, this framework might address the long-standing issue of illiquidity in corporate debt and would potentially reduce credit spreads for high-quality issuers,” Abhishek Kumar, a Securities and Exchange Board of India-registered investment advisor (Sebi-RIA), said.

Additionally, the introduction of total return swaps will also allow investors to gain exposure to corporate debt without physical ownership of the bonds. Market participants said that the introduction of derivatives for corporate bonds could help in attracting a wider range of investors, from foreign institutional investors to hedge funds, into Indian corporate bonds.

Bond market regulators, the Reserve Bank of India (RBI), as well as Sebi, had called for the need to deepen India’s corporate bonds market. In a recent change to incentivise participation in the debt market, Sebi has also floated the idea of giving discounts to retail individual investors, women, senior citizens, and others.

Government think-tank, Niti Aayog, had also released a report which emphasised the need for a developed and robust bond market in India towards achieving Viksit Bharat 2047 goals. The Economic Survey for FY26 also highlighted the same point.

On the back of these actions, the announcement from Sitharaman at the Budget presentation was seen as a welcome initiative by market participants and experts.

“The secondary corporate bond market is not liquid, though improvements are happening at the margin. The proposed market-making mechanism is a welcome move. We have to wait for the details of this mechanism,” said Joydeep Sen, columnist and former senior vice president – advisory desk at BNP Paribas Wealth Management.

Incentivising Municipal Bonds

Sitharaman also announced incentives of Rs. 100 crore for large municipal bond issuances.

The move, she said, was “To encourage the issuance of municipal bonds of higher value by large cities, I propose an incentive of Rs. 100 crore for a single bond issuance of more than Rs. 1000 crore.” Sitharaman also said these incentives will be applicable to large municipalities in addition to the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme, which incentivises bond issuances of up to Rs. 200 crore available for smaller and medium towns.

“The municipal bond market in India is at a nascent stage, as compared to developed bond markets. The support to the larger municipal corporations will encourage the larger ones to come out with bond issuances, which go towards development of the market,” said Sen.

On this, market experts said that the incentives would primarily benefit a small elite section of financially sound urban local bodies, and not the broader market. The adequacy of such an initiative will depend on further, deeper structural reforms, such as improving property tax collection and enhancing financial transparency at the municipal level.

“While fiscal incentives would help cover the cost of issuance, its sustained growth would require developing a robust secondary market and building trust among retail and institutional investors in the creditworthiness of city administrations,” said Kumar.

What’s More in Store for the Bond Market

Sitharaman also laid out the gross borrowing estimates for the central government in the upcoming financial year. The government aims to consistently bring down the fiscal deficit target and the debt-to-GDP ratio of the country towards fulfilling the Viksit Bharat goals. For FY27, the government aims to bring down the fiscal deficit to 4.3 per cent, and the debt-to-GDP ratio target at 55.6 per cent.

However, the gross borrowing through government securities (G-secs) for FY27 is seen at Rs. 17.2 lakh crore, higher than Rs. 14.8 lakh crore budgeted for the current year. Though Sitharaman announced several measures on bonds, they are not seen in generating much demand for liquid bonds in the near term.

A higher gross borrowing for the upcoming financial year was expected to manage higher bond redemptions during the year, as well as higher capital expenditure. However, the borrowing estimate is slightly higher than market expectations. While the mix of bond tenures during the year has not been released yet, market participants expect bond yields to rise further on news of higher borrowing. India’s 10-year benchmark G-sec yield was near 6.70 per cent at close on January 30, around an 11-month high even after the RBI delivered a cumulative 125 basis points of rate cuts.

"The overall gross and net borrowing numbers, along with the lack of any specific measures to address demand for bonds, will clearly weigh on market yields. Effectively, even as broader fiscal consolidation measures and the reduction in the debt-to-GDP ratio are long-term positives, the bond market in the near term will continue to depend on RBI’s open market operations to anchor yields. This remains a challenge and could keep yields elevated relative to underlying macroeconomic numbers," Rajeev Radhakrishnan, chief investment officer - fixed income, at SBI Mutual Fund, said.