The government is likely to launch sovereign green bonds in FY24 as well, beyond the proposed issuance of Rs 16,000 crore in the second half of this FY, maintaining its focus on sustainability , an official source told FE.
“This could be part of the government’s gross market borrowing plan for the next fiscal year. But it is too early to predict the size of the FY24 issue. This year this is being released as part of an exploratory exercise to gauge market appetite, so the size is modest,” he added. Issuance of green bonds represents only 1.1% of the government’s targeted gross commercial borrowing for FY23, or Rs 14.21 trillion.
As India takes over the G20 Presidency where it will draw attention to issues such as climate finance, the issuance of the green bond is timely. It is also an “important first step for the government” to develop a credible bond market for financing green projects, analysts said.
However, the government has no plans to extend tax incentives to entice investors, as it believes there is a big appetite for such bonds among global investors, the source pointed out. Thus, many international investors benefit from tax incentives, especially in some advanced countries, to invest in green bonds. Thus, additional sweetener may not be necessary, he added.
Moreover, India remains the fastest growing major economy in the world amid global turmoil as advanced economies and China face economic slowdown. Thus, the country will continue to attract many investors who expect decent returns on their investments.
Sovereign Green Bonds will be rupee-denominated papers that will be open to foreign investment through the FPI (Foreign Portfolio Investment) route. “We expect foreign ESG-focused investors to invest in these bonds. The yield on these bonds is expected to be somewhat lower than government securities of comparable duration,” the source said.
Some analysts have said that in the absence of tax incentives and higher yields, domestic investors – who are currently under no regulatory obligation to invest in green bonds – may not show much enthusiasm for the first issue of sovereign green bonds. Yields on these bonds are expected to be lower than those on other comparable government securities.
While retail investors are allowed to buy into these bonds, given that they typically opt for the instruments that generate the highest yields, they may stay away, analysts said. Even many other domestic investors may choose not to invest for this reason. However, they also believe the government can mop up the Rs 16,000 crore targeted via this route from global investors in the second half of this financial year due to the modest size of the issues, some said.
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Even without global investors, the government will still be able to raise the desired amount by enticing domestic banks or national insurance companies to subscribe, given the modest size of the issue, analysts said.
It is important to note that once sovereign green bond yields are established, this will likely influence the movement of yields on those papers with a similar duration issued by private actors.
Earlier this month, Finance Minister Nirmala Sitharaman approved a framework for the government’s first green bond issue. It will focus on funding public projects in nine areas, including renewable energy, clean transportation, climate change, sustainable water and waste management, and pollution control. The Reserve Bank of India will soon announce the duration of the bonds and other operational details after consultation with investors.
The framework has been rated as “medium green” by CICERO, the world’s leading independent reviewer of green bond investment architecture. This is the next best hue, after “dark green”, awarded by CICERO for a green bond that aligns with a climate-resilient, low-carbon future.
Analysts said concerted regulatory pressure is also needed to encourage investors, especially domestic investors, to put their money into such bonds. For example, as pointed out by Soumyajit Niyogi, Director of India Ratings & Research, if the RBI makes sustainable finance part of the banks’ priority sector lending requirements, they will have to park funds for these purposes. Other regulators may also introduce similar guidelines for institutional investors. “The green finance ecosystem in India continues to evolve and we have seen no discernible difference in yield levels between vanilla bonds and green bonds. The goal of sovereign green bonds is also to attract global investors with a strict mandate to invest in ESG instruments,” Niyogi said.