India’s municipal green bond market has the potential to mobilize up to ₹20,000 crore ($2.5 billion) by 2030, provided targeted reforms and structured support mechanisms are implemented, according to a report released on Wednesday by the CEEW Green Finance Centre.

The report, Unlocking Green Finance for India’s Urban Local Bodies Through Municipal Green Bonds, highlights that nearly 60 percent of municipal bonds issued over the past decade could have been labeled as green but were not.

This represents a missed opportunity for municipalities to access cost-effective capital and attract climate-focused investors.

Green bonds, which are designed to fund environmentally sustainable projects, are gaining traction in India.

Four of the seven municipal bonds issued in the past ten years, totaling ₹694 crore, were classified as green.

However, India’s overall municipal bond market remains underdeveloped, with just 50 issuances worth ₹6,933 crore recorded since 1997.

  1. Thara, additional secretary in the Ministry of Housing and Urban Affairs, acknowledged the challenge, stating that sustainable borrowing and repayment habits must be fostered among urban local bodies.

She suggested that initiatives such as project-linked loans and smaller, structured financial instruments modeled on schemes like Prime Minister Street Vendor’s AtmaNirbhar Nidhi could help municipalities secure financing more efficiently.

Potential and Barriers

According to the CEEW-GFC analysis, municipal bonds could reach a market size of $3 billion by 2030, with green bonds potentially accounting for up to 83 percent of this amount.

Green bonds tend to offer lower borrowing costs — by approximately 50 basis points — compared to non-labeled bonds and could benefit from government incentives such as tax breaks and interest subsidies.

However, municipal creditworthiness, outdated financial practices and limited institutional capacity continue to hinder the market’s growth.

“Cities are the engines of development, and India’s urban population is rising rapidly,” said Dr. Dhruba Purkayastha, director of growth and institutional advancement at CEEW. “Municipal green bonds present a viable means of raising long-term capital for climate-resilient urban projects, but this requires coordinated efforts between municipalities, state governments, regulators and investors.”

Policy Recommendations

To overcome these challenges, CEEW-GFC has proposed a four-point ‘RISE’ framework:

  • Reform financial practices and improve transparency to enhance municipal creditworthiness.
  • Identify bankable green infrastructure projects and assess municipal debt capacity.
  • Strengthen institutional capacity on finance and sustainability.
  • Engage financial intermediaries, including credit rating agencies and institutional investors, to streamline regulatory processes and improve investor confidence.

Ghaziabad pioneered municipal green bonds in India with a ₹150 crore issuance in 2021 for sewage treatment infrastructure. Indore followed in 2023 with a ₹244 crore issuance to finance a 60 MW solar plant. Ahmedabad and Vadodara raised ₹200 crore and ₹100 crore, respectively, in February 2024 for water treatment and climate-resilient urban services.

“India has made significant progress in developing its municipal bond market,” said Gagan Sidhu, director of CEEW Green Finance Centre. “However, transitioning to green bonds requires targeted interventions at the central and state levels. Pooling projects at the state level and extending monetary incentives under the AMRUT scheme are examples of steps that could accelerate growth.”

While the report highlights the financial advantages of municipal green bonds, it acknowledges that further research is needed to establish a direct causal link between green labeling and cost savings. The report’s projections are based on data from the CARE EDGE study, which estimates municipal bond potential through 2030.

With urbanization accelerating, stakeholders are keen to tap into climate finance at scale. If regulatory frameworks and incentives align, municipal green bonds could emerge as a key driver of sustainable urban development in India.

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