FinMin may cut back FY26 green bond issuance as 10-15 bps 'greenium' remains elusive

In keeping with the ambition to significantly reduce the carbon intensity of the economy, the Union Budget for 2022-23 announced the issuance of Sovereign Green Bonds.

The finance ministry may scale back green bond issuances in the next financial year, which begins April 1, as demand for the instrument remains tepid against expectations of a “greenium” of around 10-15 basis points (bps).

Greenium refers to the premium that the issuer receives on green bond issuances. Investors are willing to accept lower yields on green bonds due to the sustainable nature of the projects financed by the proceeds of the bond sales.

“There is no demand in the market for green bonds. It is not like we have given up but we are getting only 2-3 basis points in greenium. The government is committed to its own NDC (Nationally Determined Contributions), that we have to invest, we have to continue mobilising money for it,” a senior government official told Moneycontrol on condition of anonymity.

NDCs are at the core of the Paris Agreement and refers to the efforts by each country to reduce national emissions and adapt to the impact of climate change. As part of the agreement, countries have to pursue domestic mitigation measures to achieve the objectives of such contributions.

Few takers for green bonds

The official, however, said given the lukewarm response to India’s green bond issuances, the government may prefer to fund green projects via its usual borrowings from the market rather than relying on sustainability-linked bonds.

“This (green bonds) was done in expectation that there are a set of investors who would be willing to settle for a lower return maybe 10-15 basis points which is not the case. That does not mean that the government is giving up on its normal borrowing, it means that the government has to do its normal borrowing and invest into those projects,” the official added.

One basis point is one-hundredth of a percentage point.

For the next fiscal, ministries have proposed Rs 25,342.31 crore to fund eligible projects through green bonds. However, the amount to be raised will be notified separately.

Issuances of green bonds are part of the government’s overall borrowings through dated securities, which is pegged at Rs 14.82 lakh crore in FY26.

On whether the government is looking to scrap its green bonds agenda, the official said the finance ministry will monitor the premium it receives for these issuances for the next one or two years.

“We have to see a couple of years and we have to try; this is the third year; we will see another year or two. Any new product takes time, Indian investor does not put any premium on green bonds. World over there are certain investors who are willing to pick up green bonds on lower rates,” the official explained.

Out of Gross Market borrowing of Rs 14.01 lakh crore budgeted for 2024-25, the government planned to raise Rs 12,000 crore and Rs 20,000 crore through Sovereign Green Bonds (SGrBs) in the first and the second half of the current fiscal.

In the first half, the Centre was only able to borrow around Rs 6,500 crore through green bonds and plans to raise another Rs 20,000 crore in the second-half. However, issuances will depend on market response, the official said.

According to Budget documents, in 2023-24, the government raised Rs 20,000 crore through SGrBs, with the actual amount spent under the schemes eligible for financing through green bonds at Rs 20,785.60 crore.

In the revised estimates for 2024-25, mobilisation through SGrBs is expected to be Rs 21,697.40 crore, while additional expenditure under eligible schemes over Rs 21,697.40 crore is expected to be incurred from general revenue of the government.

To reduce the carbon intensity of the economy, the Budget 2022-23 announced the issuance of sovereign green bonds. These instruments were to help the government tap finances from potential investors for deployment in public sector projects with sustainable goals.