NSE Indices Ltd., a subsidiary of NSE, said on February 24, 2023, it had introduced the country’s first-ever municipal bond index. There is uncertainty circling around the functioning and methodologies that this new Index will follow. It is rather crucial to have a clear understanding of this new issuance to make a worthwhile investment decision. The article will walk you through the background, functioning and other necessary details of India’s first-ever bond index: The Nifty India Municipal Bond Index. Before starting off, it is essential to have a brief idea about the concept of a municipal bond.
What Is A Municipal Bond?
A municipal bond is a type of debt instrument that acts as a good source for raising funds and financing the projects undertaken by municipal corporations. The main purpose for the issuance of such bonds is to finance the capital expenditure needed for infrastructural development projects, which include the construction of schools, airports, highways, roads etc. This type of debt security is issued by states, municipalities, non-profit organisations and private agencies that are a part of such public development projects. These bonds can be traded in both primary and secondary markets.
A Municipal Bond Index, on the other hand, is a weighted index based on the market value to measure the bond market’s performance.
Nifty India Municipal Bond Index: A Walkthrough
The National Stock Exchange (NSE) on February 24 launched India’s first-ever municipal bond index: Nifty India Municipal Bond Index, at a SEBI workshop on Municipal Debt Securities in Bengaluru. The Index is said to track the performance of the Indian municipal bond market and provide better choices to fixed-income investors and act as a benchmark for passive funds. It includes a portfolio of Municipal bonds issued by Municipal Corporations having investment-grade credit ratings.
Mr. Mukesh Agarwal, CEO of NSE Indices, commented on the functionality and importance of the Index. He said, “The municipal bond market has a potential to play a pivotal role in financing the borrowing requirements of different municipal corporations in India. The proceeds from bonds issued by municipal corporations can be utilised to finance the expansion of essential municipal services through growth-driven infrastructure projects & can contribute to bridging India’s urban infrastructure financing gap. The launch of the Nifty India Municipal Bond Index – India’s first-ever Municipal Bond Index aligns with NSE’s vision to provide market representative benchmarks. The Nifty India Municipal Bond Index will track the performance of Indian municipal bond market and act as a benchmark for passive funds which will provide more investment choices to Indian fixed-income investors. I am confident that with the launch of the Nifty India Municipal Bond Index, an impetus will be created for asset managers to consider investing in the municipal bond market thereby providing an investment vehicle to fixed-income investors.”
Key Features:
- The Index has 28 municipal bonds issued by ten issuers, all having credit ratings in the AA rating category.
- The Index will act as a reference index followed by passive funds in the form of Exchange Traded Funds (ETFs), index funds, structured products, and a benchmark for asset managers.
- The Index is rebalanced every quarter.
Index Level Average Statistic
| Index Name | Yield | Residual Maturity | Macaulay’s Duration |
| Nifty India Municipal Bond Index | 8.79% | 3.74 | 3.03 |
Utility of Nifty India Municipal Bond Index:
The Indian municipal bond market witnessed an upsurge in issuances after the implementation of SEBI’s Issue and Listing of Municipal Debt Securities Regulations in 2015. Raising money from such capital markets not only helps gather funds for the process of infrastructural development but also encourages the municipal authorities to become financially sound. To keep track of the growing municipal bond performance and keep a check on this bond market in India, NSE Indices Ltd launched this bond index.
Notable Characteristics & Features
The Nifty India Municipal Bond Index has a collection of characteristics and methodologies that it deploys for keeping a record of the bond market performance. Some of the main characteristics that this index features are:
- It has investment-grade credit ratings and monitors the work of municipal bonds issued by Indian municipal corporations across maturities.
- The index value is calculated using the Total Return method (it calculates the returns from the price movements of the stocks and the payout of its dividends), including price return and coupon return.
- The Index has 28 bonds, and the weight of each security is based on the outstanding amount of that security.
- The Index has a base value of 1000, and the base date of the Index is January 01, 2021.
Index Characteristics
| Methodology | Total Return |
| No. Of Constituents In The Index | 28 |
| Launch Date | February 24, 2023 |
| Base Date | January 01, 2021 |
| Base Value | 1000 |
| Calculation Frequency | Daily-End Of Day |
| Reconstitution Frequency | Quarterly |
About NSE & NSE Indices:
NSE:
National Stock Exchange (NSE) is India’s financial exchange board which regulates the stock market and provides automatic trading facilities across the nation. It was established in 1992 to simplify the functioning of the stock market and protect the interest of the shareholders. As per the World Federation of Exchanges (WFE) 2022, NSE is ranked 3rd in the world in cash equities by number of trades. The stock exchange is also trading in the unlisted market domain, with NSE shares trading at around Rs. 3,275 a piece.
NSE Indices Ltd.:
NSE Indices Limited (India Index Services & Products Ltd. – IISL), a subsidiary of NSE, provides a variety of indices and index-related services The company owns and manages a portfolio of indices under the NIFTY brand of NSE, including the flagship index, the NIFTY 50. A fixed-income index based on government securities, corporate bonds, and other hybrid indices is also maintained by the company. The flagship index ‘NIFTY50’ is widely used to track the performance of the Indian Capital Markets
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