India is counting on debut sovereign green bond to lower financing costs

India is aiming to get much lower borrowing costs from its debut sovereign green bond in coming months.

Officials want a significant “greenium,” the premium investors pay for bonds that fund environmental projects, according to people familiar with the matter. The government has developed a framework to sell the debt in line with widely-used principles from the International Capital Market Association, and is also liaising with the World Bank over best practices, they said, declining to be named as the talks are private.

A lower cost of borrowing would help Asia’s third-largest economy finance infrastructure and meet clean energy goals, while managing a record debt issuance plan. The first green bond sale will take place before the end of the fiscal year in March, and discussions are underway with ministries to identify projects such as renewable energy, automobiles and a Ganges river restoration campaign, the people said.

India will be a latecomer to the global market for green debt, which has exploded in recent years, including debuts for Hong Kong, Singapore and South Korea. While it’s common to get lower borrowing costs thanks to strong investor demand, it’s often just a few basis points and a big greenium would be unusual. India’s finance ministry declined to comment.

“You need to do some outreach and engage with investors to have a greenium,” said Sandeep Bhattacharya, climate change advisor at GIZ and former India project manager of the Climate Bonds Initiative in Mumbai. “The size of the greenium is also very dependent on the market situation at that point in time.”

That’s particularly true this year, since global debt market sentiment has taken a hit thanks to surging inflation, central bank interest-rate hikes and the fallout from the war in Ukraine. ESG bonds are underperforming conventional debt in the sell-off, putting the size of any greeniums in doubt.


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Added to that, currency risk could pose a hurdle for foreign investors interested in India’s first green bond, which will be in rupees. The currency is down about 7% this year, poised for its worst annual depreciation since 2018 in the face of broad dollar strength despite India’s central bank selling dollars to curb depreciation. The yield on the benchmark 10-year sovereign note has climbed to 7.12% from 6.46% at the end of last year, making it more expensive for the government to raise additional funding.

India will first issue only a few small tranches of the green debt to test appetite, the people familiar said. The government budgets to raise a record 14.3 trillion rupees in the year through March 2023, and initial reports suggest green bonds will be more than 200 billion rupees.

Some funds with a green mandate are interested. Client demand for “green, social, sustainable and sustainability-linked bonds in emerging markets, both in US dollars and local currencies” means asset manager TCW Group Inc. would consider investing in India’s debut, said David Loevinger, a managing director at the Los Angeles-based firm.

Indian debt is also on investors’ radars as JPMorgan Chase & Co. conducts a semi-annual review of its emerging-market debt index, and the expulsion of Russia could open the door to India’s addition to the benchmark. If India is added to global bond indexes, “there’d be even more investment for India’s transition to a low-carbon economy,” Loevinger said.

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