Mint Explainer: India’s sovereign green bonds fail to attract investors; here’s what’s missing
India’s green bonds are struggling to stand out from plain-vanilla government securities. With no clear pricing edge or incentive, most investors see little reason to buy them. What’s behind the weak demand?
New Delhi: India’s sovereign green bond programme, launched in FY23 to fund climate-focused projects, is facing its toughest year yet. Though the government has an ambitious ₹25,342 crore borrowing target for FY26, weak investor appetite may force it to reconsider its plan after a recent 30-year reissue raised only half the intended amount. Mint unpacks the reasons behind the drag in India’s green bonds.
What’s behind the weak investor demand?
India’s green bonds are struggling to stand out from regular government securities. With no clear pricing edge or incentive, most investors see little reason to buy them.
Although markets generally anticipate a “greenium"—where green bonds carry slightly lower yields than regular ones—India’s sovereign green bonds have shown minimal and inconsistent yield differences.
While many developed markets achieve a greenium of 3-8 basis points over conventional bonds, in India, this has been limited to 2-3 bps. One basis point is a hundredth of a percentage point.
On Friday, the 10-year government bond was trading at 6.524%, while the 30-year bond was at 7.122%, according to Bloomberg data.
The domestic investor base also remains indifferent to the green label. Institutional buyers still prioritise yield and liquidity over environmental credentials. Without tangible policy nudges, differentiated tax treatment, or a strong ESG-driven demand base, these instruments struggle to attract meaningful participation beyond mandatory or symbolic allocations.
How serious is the shortfall?
In FY25, green bond issuances increased to ₹25,297.89 crore, up from ₹20,785.60 crore in the previous year, but still fell short of the target of ₹32,060.86 crore. The first half of the current fiscal year has been worse: of the ₹10,000 crore reissued recently, only ₹5,000 crore was subscribed, at a yield higher than that of comparable 10-year and 30-year bonds.
The central government aims to raise ₹10,000 crore through green bonds during the second half of the year, with two 30-year issuances of ₹5,000 crore each. Yet, it remains unlikely to meet its FY26 green bond target of ₹25,342 crore.
Why is India struggling to build a ‘greenium’?
Unlike developed markets, India lacks a deep ESG investor base or dedicated green investment vehicles. With no clear incentive structure or portfolio mandates valuing sustainability, green bonds are priced like any other government debt.
“The central challenge remains that sovereign green bonds have not yet been able to establish a sustainable greenium. In some instances, cut-off yields have been at or marginally above comparable vanilla G-Secs, which runs counter to the objective of securing a pricing advantage for green paper," said Venkatakrishnan Srinivasan, managing partner at financial advisory firm Rockfort Fincap Llp.
“Offshore ESG-focused pools and FPIs have not participated to the extent initially envisaged, and the domestic market does not yet have a critical mass of dedicated green or sustainability-focused investors. This has led to green issuances being treated on par with conventional G-Secs, limiting scope for differentiated pricing," he added.
The finance ministry and the Reserve Bank of India (RBI) have so far focused on strengthening the green bond framework and enhancing credibility, rather than introducing new direct incentives such as tax benefits.
How can India make green bonds more attractive?
Policy nudges could be crucial. Carving out green bonds as a separate SLR sub-category, requiring banks to hold a small mandatory share, could help. SLR or statutory liquidity ratio is the minimum share of a bank’s deposits that must be held in liquid assets like cash, gold, or government securities. Set by the RBI, the SLR helps ensure banks can meet obligations, manage credit growth, and maintain economic stability.
Similarly, tweaking the investment norms of pension, provident, and insurance funds to include green assets would anchor a steady investor base and eventually create a sustainable greenium.
According to a CEEW Green Finance Centre report released earlier this year, municipal green bonds could mobilise up to ₹20,000 crore by 2030, unlocking critical funding for civic and climate-resilient urban growth in India.
“Identifying viable green infrastructure projects and accurately assessing municipal debt capacity would create a stronger pipeline of bankable projects. Strengthening internal capacity on finance and sustainability would equip them to better prepare and execute projects," the report said.
Engaging financial intermediaries, including credit rating agencies, merchant bankers, development finance institutions, and institutional investors, would help cities navigate regulatory requirements and boost investor confidence, it added.
What happens next?
The government will continue to fund renewables, metro projects, and the Green Hydrogen Mission through a mix of green and regular bonds. But with borrowing costs rising and demand still patchy, the real challenge lies in creating a market that prices climate impact alongside credit risk.
That will take more than relabeling debt—it requires clearer disclosures, transparent tracking of proceeds, and fiscal or regulatory incentives that make climate-aligned investments financially attractive.
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