Government likely to issue green bonds worth ₹20,000 crore- ₹25,000 crore in FY25

New Delhi: India may boost the sale of green bonds this fiscal year to finance sustainable infrastructure projects, two people aware of the plans said, riding the increased global interest in Indian government securities.

The government, which has already decided to borrow ₹12,000 crore via green bonds in the first half of FY25, may borrow a total of ₹20,000 crore–25,000 crore through such bonds during the full year, the people said on condition of anonymity. The green bond plan, part of the government's overall borrowing programme, is likely to be announced in the full-year budget to be presented in July.

In FY24, the government had issued sovereign green bonds of ₹20,000 crore, even though the budget did not specifically mention the plan. Of this, bonds of ₹ 5,000 crore with a tenure of five years were sold in November 2023, and ₹10,000 crore worth of bonds with a tenure of 30 years in two tranches of ₹5,000 crore each in January and February 2024; bonds worth another ₹5,000 crore were sold in March.

"In all likelihood, the borrowings made through green bond instruments during the ongoing fiscal (FY25) will be higher than last year, as there is a demand for sustainable bonds in the market," one of the two people said on condition of anonymity.

On 5 March, Bloomberg Index Services said it would include 34 Indian government bonds in its Emerging Market Local Currency Index from 31 January next year. Earlier in September 2023, JP Morgan said it will add 23 Indian government bonds to its widely tracked emerging market debt index beginning 28 June, 2024. However, bond investors appear to have flocked to them even before the decision took effect. Between September and February, foreign portfolio investors’ (FPIs) assets under custody swelled by ₹77,379 crore, Mint reported on 8 March.

"There is an expectation of attracting more foreign investments due to India's inclusion in these indexes, which makes us confident that green bonds will find more interest," the first person added.

A finance ministry spokesperson didn't respond to an emailed query.

Green bonds address the funding requirements for renewable energy projects. With several financially viable projects in the public sector in the pipeline, policymakers feel the funds raised through this route will be easily utilized.

Experts said that while sovereign green bonds had minimal greenium (the premium investors are willing to pay for environmentally friendly investments) over other government bonds, greenium from these bonds is anticipated to be higher this year (FY25) due to increased interest from foreign portfolio investors, and the strategic timing of issuance of such bonds.

"Large traders including foreign banks, Indian commercial banks, and primary dealers are expected to show a keen interest in accumulating green bonds to meet the growing demand from FPIs and the anticipated repo rate cut by the central bank during the ongoing fiscal (FY25)," said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap Llp, a financial advisory firm.

"Given the potential for heightened FPI interest, it's speculated that the government may increase green bond issuances in the second half of the fiscal year to accommodate this demand," Srinivasan said.

"Overall, the scenario depicts a strategic move by the Indian government to tap into the growing demand for environmentally sustainable investments, capitalizing on increased FPI interest and favourable market conditions," he added.

The yield on the Indian 10-year government bond was trading at 7.179% on 12 April. The yield had jumped in the past months as central banks, especially in advanced economies, have kept their interest rates unchanged, impacting demand for emerging market bonds.

Funds raised by selling green bonds can’t be utilized for projects related to fossil fuel extraction, production or distribution, or nuclear power. However, they can be used for government investments, subsidies, grants-in-aid, tax foregone or operational expenses to support climate mitigation and sustainable green initiatives to reduce carbon intensity.