India to issue $3.3 billion of Sovereign Green Bonds

There is an interesting background about India issuing sovereign bonds. The plan had been sanctioned about two years ago in the Union Budget with a target to raise up to $10 billion via sovereign bonds. However, internal objections mounted and eventually the PMO intervened and the plan was shelved.

It is in this light that the latest decision by the Indian government to issue $3.3 billion worth of sovereign green bond issue assumes significance.

Sovereign green bonds are just like any other sovereign bonds that are issued by the government authority. However, the only difference is the application of the funds so raised since such funds can only be used in activities and projects that reduce the carbon footprint like renewable energy, green hydrogen, chargeable batteries etc.

The cost of funds is lower in these green bonds as it has carbon neutrality benefits for the buyers of such bonds.

While the finer details are yet to be confirmed, the issue is expected to debut in the market around the first or the second quarter of FY23. This will be the first tranche and the centre may look to sell green bonds beyond $3.3 billion if there is reasonable appetite for such paper.

This issue marks a clear shift in the stance of the Indian economy to move towards a low-carbon economy. The cost and other modalities are yet to be worked out.
 

For India, the foray into green bonds, to an extent offsets the risk of sovereign bonds. Normally sovereign bonds tend to enhance the liability of the issuer if the domestic currency weakens since such bonds are normally denominated in hard currencies like the US Dollar or the Euro.

For the Indian economy, this move will also give a boost to their efforts to meet the goal of becoming net-zero emissions and carbon neutral by the year 2070.

While the yield on the 10-year benchmark sovereign bonds are quoting at around 6.85%, the government expects to be able to borrow at lower rates via green bonds.

That will be the main attraction because unless the differential is significant enough, it may not make much sense for India to take on the risk of sovereign debt. This is in sync with the global boom in sustainable energies, sustainable strategies and sustainable business models.

Indian business groups like Reliance and Adani have lined up billions of dollars in green projects like renewable energy, green hydrogen, EV batteries, EV ecosystems etc.

India is already the third-largest emitter of greenhouse gases and plans to quadruple its renewable power generation capacity by 2030. With the global investor and lender appetite for renewable businesses at an all-time high, the time is appropriate for the launch.