Economy
Centre may increase green bond target by 25% to ₹25,000-26,000 crore next year to fund renewable energy projects
Summary
The Indian government is counting on growing demand for eco-friendly financing. With India’s inclusion in major global bond indices, investor interest in green bonds is expected to surge.
New Delhi: The government plans to raise ₹25,000-26,000 crore through sovereign green bonds in the next fiscal year, marking an at least 25% increase from its ₹20,000 crore target for FY25, to boost financing for climate-friendly projects, two people familiar with the matter toldMint.
The move aligns with the central government’s objective of leveraging green bonds more extensively to fund sustainable infrastructure projects, with an announcement likely to be made in the upcoming budget, the people said.
"The borrowings made through green bond instruments during the next fiscal (FY26) are likely to be about 25-30% higher than the previous fiscal as there is a demand for sustainable bonds," the first person said, requesting anonymity. “India's inclusion in various bond indices like the JPMorgan and Bloomberg indices is expected to lead to substantial interest from foreign portfolio investors in the long-term for sovereign green bonds. So, higher borrowings from this instrument can be expected in FY26."
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Indian government bonds were added to the JPMorgan Government Bond Index-Emerging Markets on 28 June, with a phased inclusion scheduled to be completed by 31 March 2025, when India's weight in the index is projected to reach 10%. The bonds will be included in the Bloomberg Emerging Market Local Currency Government Index and related indices over a 10-month period starting 31 January 2025.
A finance ministry spokesperson didn't respond to emailed queries.
Typically, green bonds help fund renewable energy projects. With several such public sector projects in the pipeline, policymakers expect the funds raised through this route to be easily utilized.
Investor interest
The government issued sovereign green bonds of ₹20,000 crore in FY24 and planned to borrow ₹12,000 crore via green bonds in the first half of FY25. Although investor interest in green bonds hasn’t been consistent, experts said the government is committed to price discipline and building a sustainable market.
In June, the Reserve Bank of India cancelled a 10-year green bond auction due to the market's inability to pay the premium. During the first half of FY25, the RBI, on behalf of the Central Government, raised about ₹1,700 crore through green bonds, less than the total notified amount of ₹6,000 crore.
Also Read | Mint Explainer: Why the government is embracing sovereign green bonds
The government then raised ₹5,000 crore in November, after almost ₹3,500 crore devolved on primary dealers, suggesting lack of investor interest. It plans to raise an additional ₹15,000 crore through green bonds in December, January and February, taking the proceeds for the ongoing fiscal to about ₹21,000-22,000 crore.
The partial devolvement of ₹3,497.985 crore in November highlights the issuer’s commitment to price discipline, said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap Llp, a financial advisory firm.
“Market participants can interpret this as a sign of the government’s intent to build a credible and consistent framework for green bond issuances," Srinivasan added.
The government’s deliberate approach to preserving green bond pricing underscores its vision of positioning sovereign green bonds as a benchmark asset class within the ESG (environmental, social, and governance) investment landscape.
“By pricing these bonds competitively against conventional benchmarks, the government aims to attract long-term institutional investors and build a sustainable green bond market," said Srinivasan.
On 8 October, Mint reported that the Centre, which raised ₹1,700 crore through green bonds in H1 of FY25, plans to raise ₹20,000 crore through sovereign green bonds during the second half. The Centre typically raises the bulk of capital from green bonds during the second half.
Also Read | Sovereign green bonds: Know the risks and rewards
However, the plan is conditional on the market paying a green premium – the difference between the yield or the return investors receive on a green bond and a similar conventional bond – for the offering.
"The market will have to pay the premium for it to be an attractive tool to raise capital. While in the past the RBI cancelled a 10-year green bond auction due to the market's inability to pay the premium, there's an increasing acceptance of the investors coming around the idea of greenium," the second person said.
Currently, the 10-year government securities bond yield hovers around 6.7%, supported by the RBI's record surplus dividend transfer to the government.
