Sovereign green bonds to provide pricing reference to fund raising: RBI's Rajeshwar Rao

The MPC panel needs to see a decisive decline in inflation over several months before it pauses rate hikes or shifts its stance. (File image)

The Reserve Bank of India's (RBI) Deputy Governor Rajeshwar Rao believes that sovereign green bonds (SGB) will provide a pricing reference for private sector entities raising funds through such bonds in India.

"The issuance of SGBs would help in creating an ecosystem which fosters a greater flow of capital into green projects and entities undertaking such projects," Rao said at the Business Standard BFSI Insight Summit.

In the Budget 2022-23, Finance Minister Nirmala Sitharaman had announced that the government will raise funds through bonds as part of its market borrowing of the current financial year.

The government planned to raise Rs 16,000 crore of sovereign green bonds in the fiscal year ending March.

The proceeds from the SGB will be deployed in public sector projects which will help in reducing the carbon intensity of the economy.

Last month, the Centre released the framework for its proposed sovereign Green Bonds, with a committee headed by the Chief Economic Adviser being put in place to select eligible projects for financing, which do not include large hydropower plants.

The proposed 'Green Finance Working Committee' will meet at least twice a year to support Ministry of Finance with selection and evaluation of projects and other relevant work related to the Framework.

Rao said recognising the need for concerted efforts in the area, the Reserve Bank has concomitantly set up a Sustainable Finance Group (SFG) within its Department of Regulation in May 2021 to lead the regulatory initiatives in area of climate risk and sustainable finance in the Indian context.

In July, the central bank has released a discussion Paper on 'Climate Risk and Sustainable Finance'. Along with this, they had also released the results of a survey undertaken to assess the approach, level of preparedness and progress made by leading scheduled commercial banks in India for managing climate-related financial risk.

The survey covered 12 PSU banks and 16 private banks, which provided insights that will help in shaping regulatory and supervisory approach, Rao said.

Rao further added that to support this acceleration, a number of structural changes may be needed in the traditional lending approach, including evaluation and certification of the green credentials of projects.

"In order to give focused attention to scaling up green finance, banks and financial institutions would have to invest in human resources and capacity building efforts as well as integrate environmental and social risk considerations into their corporate credit appraisal mechanisms," he said.