Like several emerging markets, India also turned to sovereign green bonds to help fund its transition to a low-carbon economy, but investor demand remains weak.
While green bonds help governments raise capital for clean energy and infrastructure, India’s issues have struggled to secure a meaningful ‘greenium’— lower borrowing costs typically associated with such bonds. As a result, planned allocations for key schemes, including grid-scale solar, have been slashed.
With muted investor interest, India is relying on general revenue to bridge funding gaps. Addressing liquidity issues, improving reporting transparency, and exploring sustainability bonds could help boost demand and expand green finance in the country.
What are green bonds?
Green bonds are debt instruments issued by governments, corporations, and multilateral banks to raise funds for projects that reduce emissions or enhance climate resilience.
Issuers typically offer green bonds at lower yields than conventional bonds, assuring investors that the proceeds will be used exclusively for green investments. The difference in yield — known as the green premium, or greenium — determines the cost advantage of green bonds. A higher greenium allows issuers to raise funds at lower costs, making green investments more attractive.
Investors in green bonds often seek stable, long-term returns, and may also have internal or external mandates to allocate a portion of their funds to green financing. Despite their potential, green bonds constitute a small part of the debt market and overall climate financing, as governments strengthen reporting practices and introduce incentives to attract investors.
Why green bonds?
Sovereign green bonds (SGrBs) are those that are issued by sovereign entities, like the Government of India, which formulated a framework for issuing such bonds in 2022. The framework defines “green projects” as those that encourage energy efficiency in resource utilisation, reduce carbon emissions, promote climate resilience, and improve natural ecosystems.
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Since 2022-23, India has issued SGrBs eight times, and raised almost Rs 53,000 crore. Each year, the government uses roughly 50% of proceeds from SGrBs to fund production of energy efficient three-phase electric locomotives through the Ministry of Railways.
For 2024-25, the revised estimates for allocations to schemes eligible under SGrBs include Rs 12,600 crore for electric locomotive manufacturing, roughly Rs 8,000 crore for metro projects, Rs 4,607 crore for renewable energy projects, including the National Green Hydrogen Mission, and Rs 124 crore for afforestation under the National Mission for a Green India.
Why are investors not excited?
India’s SGrB issues have struggled to gain traction due to muted investor demand, making it difficult for the government to secure a greenium. Despite efforts, including easing rules for foreign investors, auctions have seen limited participation, with bonds often devolving to primary dealers.
While globally greeniums have reached 7-8 basis points, in India it is often at just 2–3 basis points. This limits the expansion of SGrBs as a viable funding source.
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A key challenge is liquidity. Small issue sizes and investors holding bonds until maturity have stifled secondary market trading, reducing their appeal. Additionally, India lacks a strong ecosystem of social impact funds and responsible investing mandates, which in other markets drive green bond demand.
Why does this matter?
The government’s inability to raise adequate proceeds from SGrBs impacts funding for schemes eligible under it and increases pressure on general revenue to meet the shortfall.
Initially, the estimated funding requirement from SGrB proceeds for 2024-25 stood at Rs 32,061 crore. However, after unsuccessful attempts to sell SGrBs due to higher yields cited by investors, the revised estimate has been lowered to Rs 25,298 crore. As a result, allocation for a scheme promoting grid-scale solar projects has been slashed from Rs 10,000 crore to Rs 1,300 crore.
The total expenditure in the current financial year will be made against expected proceeds amounting to Rs 21,697 crore, and to bridge the shortfall, roughly Rs 3,600 crore will be drawn from the government’s general revenue.
What can be the way forward?
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According to a recent World Bank report, emerging market sovereign issuers tend to issue more bonds that finance a combination of green and social projects compared to advanced market sovereign issuers, which overwhelmingly issue green bonds. In other words, bonds for projects that combine green and social projects, also known as sustainability bonds, could boost investor interest and increase proceeds from issues.
The report also noted that sovereigns take considerable time to prepare the post-issuance allocation and impact report, which impacts investor interest.
“Most [investors] highlighted that the information provided in the allocation and impact report is used to assess the use of proceeds, screen the issuer’s bonds for inclusion in their portfolio, and use the quantitative data to further refine their internal data models and methodology,” it said.
The Department of Economic Affairs, which oversees allocation of proceeds, hasn’t yet published the allocation report for 2023-24.
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To increase investor confidence, India can also partner with multilateral development banks to back its green bonds strategy with their credit ratings given that it does not have a very high rating itself.