Your Money: A growing market for municipal bonds in India

By FE Online9 days ago

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With todays free market philosophy, municipalities will find it difficult to levy taxes beyond a point. Muni issues are a logical solution

Of course, in practice, it is likely that the concerned state government will bail it out, if there were to be issues pertaining to the repayment of such bonds.

By Sunil K. Parameswaran

Municipal bonds or Munis are a very popular type of fixed income securities in the US. These bonds are debt securities, issued by local governments, or municipalities in the US. They are likely to become more popular in India as time goes by. In the US, there may be about two million Muni issues outstanding at any point of time. Consequently, there could be issues pertaining to liquidity. That is, people who seek to sell such bonds may face issues in locating suitable buyers at a mutually acceptable price.

State government bonds

Municipalities are government entities like the central or federal government of a country and its state governments. Consequently, they cannot issue equity shares. Thus, bonds represent the only securities they can issue to fund their expenses. To augment taxes, tolls, and other sources of income, municipalities therefore regularly issue bonds. Unlike central governments, which can always print more money, municipalities cannot. Consequently, these governments can always default on debt. Of course, in practice, it is likely that the concerned state government will bail it out, if there were to be issues pertaining to the repayment of such bonds.

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