India’s infrastructure financing landscape is gradually evolving, with the bond market playing a greater role alongside traditional funding channels. Infrastructure bond issuance volumes have risen steadily over the past few years, supported by growing investor interest. Over the years, the market has overcome long-standing bottlenecks, including concerns around low credit ratings for infrastructure projects. At the same time, significant work remains. Building a stronger ecosystem for credit enhancement, along with expanding the investor base through calibrated retail participation and improving confidence through a more robust insolvency framework, will drive the next phase of growth. With more sectors showing readiness to tap the bond market, the key opportunity is to convert this momentum into a deeper and more diversified infrastructure bond market.
Market overview
The infrastructure bond market has recorded steady improvement over the past few years. However, it is still some distance away from realising its full potential. A key constraint is that a sizeable pool of high quality project debt continues to remain on bank books. At the special purpose vehicle (SPV) level, around Rs 6 trillion of AA- and AAA-rated papers are currently held as bank loans. These are largely operational projects and, by their nature, are well suited for long-term investors such as pension and insurance companies. However, a meaningful shift of this debt from banks to these long-duration pools has yet to take place. As a result, infrastructure still accounts for only about 10 per cent of the overall bond market, even as sector fundamentals have strengthened. If this Rs 6 trillion corpus migrates from bank books to long-term investor balance sheets, it could prove to be a game changer for both the infrastructure sector and the bond market.
Issuance activity, meanwhile, has picked up pace. Over the past two financial years (2023-24 and 2024-25), primary infrastructure debt issuances have been in the range of Rs 700 billion-Rs 800 billion annually. In 2025-26, issuance in the first seven months has already reached about Rs 710 billion, broadly matching last year’s levels, and total issuances are expected to cross Rs 1 trillion by the end of the year.
Tenor remains a key gap between bank funding and the bond market. Banks are comfortable lending for 12-15 years. In the bond market, long-tenor paper is yet to be issued at scale. That said, capital markets are increasingly demonstrating flexibility in structuring. Over the past six months, issuances have ranged from 1 year to 20 years, allowing participation across investor buckets. For instance, mutual funds in the one- to five-year segment, insurance in the five- to 10-year segment, provident funds in the 10- to 20-year segment, and infrastructure debt funds in the 15- to 20-year bracket.
Recently, the airport sector has emerged as a notable example of this evolving long-term maturity profile. The Bangalore International Airport (BIA), for instance, undertook a straight 15-year refinancing of Rs 90 billion. Even with such developments, demand continues to outstrip supply, with investors seeking more issuance than is currently coming to market.
Key challenges and priorities
A rate preference mismatch remains a key friction point for issuers. Developers are used to floating-rate bank loans, while capital markets are largely a fixed-rate market. Although structures can be designed with features that allow issuers to move between fixed and floating exposures, the product is still predominantly fixed rate, requiring issuers to adapt their funding approach. On the investor side, pension and insurance companies have not yet absorbed the available pool of operational, highly rated infrastructure debt at scale.
A bigger structural constraint is the limited development of the credit enhancement ecosystem. As infrastructure financing requirements grow in the country, not every issuer or project will be AA or AAA rated. Even where SPV structures achieve higher ratings, the underlying risk still needs to be underwritten. Credit enhancement and guarantee mechanisms are therefore critical for widening the issuer base and enabling more issuers to access the bond market. For this segment to scale, guarantee pricing needs to be more market-based, with greater flexibility in how charges are determined. In particular, removing the cap on charges for guarantees would help institutions take underwriting risk with greater comfort.
Reform priorities are centred on two areas. The first is strengthening the credit guarantee ecosystem by bringing in more players, rationalising guarantee charges and making the space more market-based. The second is widening the buyer base, since fundraising ultimately depends on subscription, and the market remains reliant on a limited set of repeat participants. A broader investor base is essential to avoid the same players returning for infrastructure issuances repeatedly, which can overleverage the ecosystem and raise financial stability concerns. In this context, expanding the pension fund ecosystem is important, as it is naturally aligned with long-term infrastructure debt. Retail participation is also an untapped potential. Bonds issued by strong institutions could provide an initial route to expand retail participation, while direct retail exposure to infrastructure bonds may be premature until the framework matures. A gradual approach could be supported through incentives, as seen in Brazil, where tax benefits were extended to retail investors investing in infrastructure, which led to retail funding in the sector scaling significantly over time.
Investor confidence is closely linked to the robustness of the Insolvency and Bankruptcy Code (IBC). While the IBC has supported bond market development over the past five years, further improvements are needed, particularly faster and more predictable resolution timelines and fewer contradictory judgments. A more time-bound and certain IBC process would strengthen institutional confidence and, over time, support broader participation, including retail investors. Overall, the current ecosystem continues to be driven by a narrow issuer base. For the market to open up meaningfully, stronger government intervention, entry of new players, and wider privatisation efforts will be important.
Upcoming opportunities
Several sectors could deepen their bond market participation as cash flows become more predictable and market dynamics stabilise. The green energy ecosystem, in particular, is yet to fully leverage this route. With returns and market conditions still evolving, equity-led financing will continue to take centre stage unless there is meaningful government support. This also reinforces the fact that raising debt without proven returns remains risky, especially in emerging technology segments where demand visibility and competitiveness are still uncertain.
Near-term opportunities are stronger in sectors with stable structures and strong counterparties. Operational hybrid annuity model (HAM) road projects have significant potential, as payments are backed by the government and key terms are largely fixed. With many HAM assets now rated AAA, they are well suited for long-term investors and better placed in the bond market than on bank books. Transmission assets also offer a relatively low-risk profile, supported by established collection mechanisms. The power sector – both conventional and renewable – can further increase its bond market participation, alongside continued issuance from roads and airports.
Newer asset classes could also emerge as meaningful contributors. Data centres were seen as a potentially large opportunity, given their similarity to a real estate investment trust or rental-based structure and the presence of strong counterparties. Warehousing and logistics are another growing segment, although the market still lacks a long enough history and data to demonstrate the consistency of revenue streams over the next five to 10 years.
Urban infrastructure financing through municipal bonds remains a significant opportunity. Currently, only the top 10-15 municipal corporations are in a position to tap the market, given their financial profiles. International experience offers a reference point, with the US municipal bond market estimated at around $4 trillion, supported by high retail participation and tax benefits, with proceeds deployed across urban assets such as stadiums, hospitals, schools, and libraries. In the near term, state-level undertakings and other cash flow-based entities also provide a practical route through securitisation, as seen in issuances of around Rs 100 billion by the UP Power Corporation.
The way forward
The next phase of bond market deepening will depend on widening participation beyond the current set of repeat issuers and investors. The most immediate opportunities lie in operational assets with stable structures and strong counterparties, such as HAM roads and transmission, while other sectors such as power, data centres, airports, and warehousing and logistics can scale up as revenue visibility and market confidence improve.
Progress on municipal bonds is likely to be gradual. Only a limited set of municipal corporations are currently positioned to access the market, and wider adoption will require stronger capacity and preparation on the issuer side. In the interim, cash flow-based securitisation by state-level undertakings can provide a more practical route to bring such issuances to the market.
Investor confidence will continue to hinge on the strength of the insolvency framework. A more robust IBC framework, with clearer outcomes and realistic, time-bound resolutions can strengthen institutional participation and, over time, support wider participation. w
Based on a panel discussion among key industry experts from Grant Thornton Bharat; Trust Group; Crisil Ratings and Trilegal, at a recent India Infrastructure conference.
