Indian green bonds may see better demand, greenium on JP Morgan inclusion

The Union Budget for 2022-23 announced the issuance of Sovereign Green Bonds

JP Morgan's inclusion of Indian government securities (G-Secs) beginning June 2024 may benefit India's green bonds programme as greater foreign inflows may also increase demand for the country's sustainability-linked debt instrument, a government official said.

On September 22, JP Morgan announced that Indian government bonds will be a part of its Government Bond Index-Emerging Markets (GBI-EM) global index suite from June 2024, fuelling expectations that foreign investors will pump billions of dollars into India to buy its sovereign debt.

Economists have pegged the quantum of inflows following this development at $24 billion over 10 months.

"There are expectations that once JP Morgan comes in from June 2024, we may also see more interest for Indian green bonds, the premium on which has not been up to the mark so far," the government official said.

The finance ministry has not been impressed by the 'greenium', or green premium, on its green bond issuances, which has, for the most part, been significantly lower than initial expectations of it being 5-10 basis points (bps) below the prevailing market rates.

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.

In keeping with the ambition to significantly reduce the carbon intensity of the economy, the Union Budget 2022-23 announced the issuance of Sovereign Green Bonds. These instruments are expected to help the Indian government tap finances from potential investors for deployment in public sector projects with sustainable goals.

In FY 2022-23, the Centre raised Rs 16,000 crore through Sovereign Green Bonds, while the actual amount spent under the schemes eligible for financing through these bonds was Rs 16,923 crore. The additional amount of Rs 923 crore was incurred from the general revenues of the government. The first tranche of issuances fetched a greenium of 6 bps.

In the current fiscal, the government raised Rs 20,000 crore through green bonds, starting with Rs 5,000 crore through a five-year paper in November 2023 that fetched the Centre a greenium of just 1 bps. The remaining amount was raised in tranches through 10-year and 30-year papers.

In 2023-24, the Centre received an average greenium of just 2 bps across all tranches. This is despite including a paper with a longer maturity period of 30 years expecting greater participation from insurance companies and pension funds.

"Borrowing via green bonds is part of the overall borrowing. Considering the amount of work that goes into green bond structuring, the returns are low. However, once JP Morgan comes in, there could be more interest from foreign investors, and as a result, next year the premium on yields on green bonds should be better," this official said.

Though the finance ministry has questioned the purpose of offering green bonds due to lower premiums on issuances, market participants have requested the government to continue with this programme, the
official added.

According to a trader, who spoke on condition of anonymity, "there is not much demand for Indian green bonds, and the premium on yields is unlikely to be more than 2-4 basis points since banks and mutual funds do not have a specific green mandate."

However, with JP Morgan index inclusion, more foreign firms are expected to invest in Indian bonds, and some of them could shift a part of their funding to green bonds given that they have mandates to invest in such instruments, the trader added.

In 2024-25, the proposed fund requirement for green projects from green bond proceeds has been pegged at Rs 32,061 crore. However, the actual amount to be raised is likely to be around Rs 20,000 crore, that too, in the second half of the fiscal year, another government official said.

The Centre is eyeing gross borrowings of Rs 14.13 lakh crore through the issuance of bonds, including green bonds, in 2024–25.