Premium on sovereign green bond yields may not jump despite RBI move, say experts

Bond

The premium or greenium on sovereign green bonds is unlikely to rise despite the Reserve Bank of India (RBI) permitting eligible foreign investors in the International Financial Services Centre (IFSC) to invest in these securities, experts said.

This is because the RBI move is unlikely to meaningfully increase the demand for these securities, experts said. Additionally, they expect that issuances will also not rise this year.

Greenium refers to the premium that the issuer receives on green bond issuances.

“I do not expect meaningful increase in demand and premium after allowing FPIs to invest into sovereign green bond at IFSC,” said Mataprasad Pandey, Vice President, Arete Capital Service.

Umesh Kumar Tulsyan, Managing Director of Sovereign Global Markets, a New Delhi-based fund house, said he does not see any substantial rise in green bond issuance soon this year.

“We may see gradually increasing supply of green bond issuance as the demand grows,” Tulsyan added.

On April 5, the RBI, after the monetary policy meeting, said it had decided to permit eligible foreign investors in the International Financial Services Centre (IFSC) to also invest in Sovereign Green Bonds (SGrBs) to facilitate wider participation of non-residents.

A scheme for investment and trading in SGrBs by eligible foreign investors in IFSC is being notified separately in consultation with the Government and the IFSC Authority, RBI said.

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Green bonds in FY25

The government  will borrow Rs 12,000 crore through green bonds in the first half of the current financial year. This will be part of the overall borrowing calendar of the first half of the current financial year.

The Centre will borrow Rs 7.50 lakh crore via the issuance of government securities in the April-September period of FY25.

At Rs 7.50 lakh crore, the scheduled first-half borrowing of the central government amounts to 53.08 percent of the full-year estimate, the Finance Ministry said in a statement on March 27.

The Interim Budget for 2024-25 had pegged the Centre's full-year gross borrowing estimate at Rs 14.13 lakh crore from the markets.

The Reserve Bank of India (RBI) manages the borrowing programme on behalf of the government by issuing bonds via auctions every Friday.

Also read: Stronger growth provides RBI policy space to remain on pause

Demand for bonds

In the last few months, the demand for Indian bonds has increased sharply from foreign investors after the inclusion announcement in the global bond index.

Debt investments by foreign investors have risen sharply since the first announcement about the inclusion in September 2023, and since last November, monthly investment by these entities in the Indian debt market has remained above Rs 10,000 crore.

Apart from this, investments by these entities in Indian government securities through the Fully Accessible Route (FAR) has also seen a sharp surge of over 100 percent since the announcement.

FAR enables non-residents to invest in specified government of India dated securities without any investment ceilings.