The Government’s decision on issuing sovereign green bonds at scale underscores its commitment to promote and support sustainable finance and green initiatives.
In a significant move towards sustainable finance, the upcoming Union budget is expected to propose the issuance of sovereign green bonds worth Rs 25,000-30,000 crore as part of the borrowing schedule for FY25. A significant portion of these bonds is expected to be sold in the second half of the fiscal year. The yields will be used to fund sustainable infrastructure projects, underscoring the government’s commitment to green finance initiatives.
Interest in green bonds is increasing, mirroring investors' desire to align financial goals with environmental values amidst climate change concerns. Green bonds—fixed-income investments funding projects with positive environmental impacts—are increasingly appealing to those looking to contribute to positive change. In FY23, the government raised about Rs 16,000 crore through sovereign green bonds, which increased to Rs 20,000 crore in FY24. The anticipated hike to Rs 25,000-30,000 crore for FY25 highlights the government’s dedication to expanding green finance.
Though the FY24 budget did not mention green bonds, a phased Rs 20,000 crore green bond plan was later introduced for the second half of the borrowing calendar. Out of this, Rs 5,000 crore worth of bonds with a five-year tenure were sold in November 2023 and Rs 10,000 crore in 30-year bonds across January and February 2024, with another Rs 5,000 crore sold by March.
Several factors drive this increased target. India's recent inclusion in the JP Morgan bond index fund is expected to attract significant interest from foreign portfolio investors (FPIs) in long-term sovereign green bonds. On top of this, the country's central bank has permitted FPIs to invest in these bonds via the International Financial Services Centre (IFSC), further boosting market confidence.
Last September, JP Morgan announced it would add 23 Indian government bonds to its emerging market debt index starting June 28, 2024, while Bloomberg Index Services had earlier stated it would include 34 Indian government bonds in its Emerging Market Local Currency Index from January 31 next year. Interestingly, the government did not accept bids in the Rs 6,000 crore sovereign green bond auction held on May 31, despite receiving bids totalling Rs 12,677 crore. For green bonds to effectively support borrowing plans, they must offer a cost advantage over conventional bonds, especially considering their eco-friendly label.
On June 21, the yield on the Indian 10-year government bond settled at 6.973 percent, a near-one-year low due to the record surplus dividend transfer by the RBI to the government, sparking hopes of the Centre lowering its fiscal deficit and borrowing.
Funds raised through green bonds are not permitted to be used for projects associated with fossil fuel extraction, production, distribution, or nuclear power. However, they can be used to support government investments, subsidies, grants-in-aid, tax incentives, or operational expenses aimed at climate mitigation and sustainable initiatives to reduce carbon intensity.