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 NSE Indices Ltd, the subsidiary of India's National Stock Exchange (NSE), has launched the country's first ever Municipal Bond Index in the backdrop of rising appetite for such instruments among investors.

The company launched the Nifty India Municipal Bond Index at a workshop conducted by markets regulator Securities and Exchange Board of India in Bengaluru, the exchange said in a release on Friday.

The index will track the performance of municipal bonds issued by Indian civic bodies across maturities with an investment-grade credit rating. It currently has 28 municipal bonds issued by 10 issuers rated AA.

The Municipal Bond Index will act as a benchmark for passive funds, providing more investment choices to fixed income investors and creating an impetus for asset managers to consider investing in such bonds, Mukesh Agarwal, chief executive officer of NSE Indices said in the statement.

This comes at a time when both market regulators the government are nudging civic bodies into tapping the municipal bond market to fund infrastructure projects.

In the federal budget for fiscal 2024 announced earlier this month, the government said it will provide incentives to urban civic bodies to improve their finances and credit worthiness, and help them raise funds through municipal bonds.

Last week, the Indore Municipal Corp's debut public issue of green bonds saw a strong demand from investors across categories, with the civic body raising 2.44 billion rupees through these bonds.

In January, Reuters reported that an Indian local government body - Pimpri Chinchwad Municipal Corp - was planning to raise 2 billion Indian rupees through municipal bonds in March.

Between 2016-17 and 2020-21, nine municipal bodies raised around 38.40 billion rupees through bonds, the Reserve Bank of India said in its report on municipal finances in November.