Immune homeostasis is delicately mediated by the dynamic balance between effector immune cells and regulatory immune cells. Local deviations from immune homeostasis in the microenvironment of bone fractures, caused by an increased ratio of effector to regulatory cues, can lead to excessive inflammatory conditions and hinder bone regeneration. Therefore, achieving effective and localized immunomodulation of bone fractures is crucial for successful bone regeneration. Recent research has focused on developing localized and specific immunomodulatory strategies using local hydrogel-based delivery systems. In this review, we aim to emphasize the significant role of immune homeostasis in bone regeneration, explore local hydrogel-based delivery systems, discuss emerging trends in immunomodulation for enhancing bone regeneration, and address the limitations of current delivery strategies along with the challenges of clinical translation.