Centre likely to issue green bonds worth over ₹25,000 crore in FY25

New Delhi: The upcoming Union budget may propose to issue sovereign green bonds worth about ₹25,000 crore- ₹ 30,000 crore as a part of the borrowing schedule for FY25, and a large chunk of it is likely to be sold during the second half of the year, two people aware of the matter said.

Proceeds from the sale will finance sustainable infrastructure projects.

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This is seen as evidence of the government’s commitment to scaling up green finance initiatives.

"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," said the first person mentioned above, requesting anonymity. 

“The centre is likely to raise about ₹ 25,000 crore- ₹30,000 crore from green bonds as a part of the borrowing calendar for FY25,” the person added.

Interest in green bonds on the rise

Amid pressing issues like climate change and other environmental challenges, green bonds—fixed-income investments used to fund projects with a positive environmental impact—have found interest among investors to align their financial goals with their values and contribute to positive change.

During FY23, the government raised about ₹16,000 crore through sovereign green bonds, which was hiked to about ₹20,000 crore in FY24. 

The anticipated increase to ₹25,000-30,000 crore for FY25 underscores the government’s commitment to scaling up green finance initiatives, said the person.

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So far, the government has decided to raise ₹12,000 crore from the sale of green bonds during H1, FY25.

Interestingly, the budget for FY24 made no mention of green bonds. However, the government later included a phased  ₹20,000 crore green bond plan for the second half of the borrowing calendar.

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 were sold across January and February 2024; bonds worth another  ₹5,000 crore were sold by March.

India's inclusion in JP Morgan index

"Several factors are driving this increased target. India’s recent inclusion in the JP Morgan bond index fund is expected to attract substantial interest from foreign portfolio investors (FPIs) in long-term sovereign green bonds. Additionally, the Reserve Bank of India (RBI) has permitted FPIs to invest in these bonds via the International Financial Services Centre (IFSC), further boosting market confidence," said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap Llp, a financial advisory firm.

Last September, JP Morgan said it would add 23 Indian government bonds to its widely tracked emerging market debt index beginning 28 June 2024, while Bloomberg Index Services had in March said it would include 34 Indian government bonds in its Emerging Market Local Currency Index from 31 January next year.

Interestingly, the government did not accept bids in the sovereign green bond auction of ₹6,000 crore held on 31 May, despite receiving bids totalling ₹ 12,677 crore.

"It is assumed that the government found the ‘greenium’  (premium for green bonds) unsatisfactory. Additionally, election-related spending restrictions played a role in this decision. Similar constraints led to the cancellation of treasury bill auctions during the election period," added Srinivasan.

Cost advantage

For green bonds to support borrowing plans, they need to offer a cost advantage over conventional bonds, especially considering their eco-friendly label, said the second person mentioned above, who didn't want to be named.

"It is prudent to raise money via the green bonds route, only if it provides an advantage over similar issues of conventional bonds. If conventional bonds yield 7%, green bonds should be at a discount and shouldn’t have more than 6.7%-6.8% yield to be feasible," the person said.

The yield on the Indian 10-year government bond settled at 6.973% on 21 June.

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The 10-year yield has fallen to a near-one-year low due to the record surplus dividend transfer by the Reserve Bank of India (RBI) to the government, sparking hopes of the Centre lowering its fiscal deficit and borrowing.

A finance ministry spokesperson didn't respond to emailed queries.

Funds raised by selling green bonds can’t be utilised 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.