The finance ministry and Reserve Bank of India are trying to work out how to place the next tranches of sovereign green bonds in FY24 in order to command a higher ‘greenium’ than the low 2-4 basis points (bps) discovered in the latest tranche in February. The ‘greenium’ is the discount on the yield that the sovereign green bond commands over traditional government securities (G-Secs).
Analysts have suggested the government put out a regulatory mandate for financial institutions that would require them to invest a portion of their assets in such bonds. This, they believe, could be one way to generate demand for green bonds at relatively high greeniums.
For the first time, the Centre mobilised Rs 16,000 crore through two tranches of green bonds in January-February. The cut-off yield on the bonds — 5-year and 10-year papers — was 2 to 4 bps lower (greenium) than traditional G-Secs of comparable maturity in the second tranche of Rs 8,000 crore on February 9.
The cut-off yield on the 5-year green bond was 7.23% and that for the 10-year bond was set at 7.30%, compared with 7.25% and 7.34% for comparable G-Secs, respectively.
Besides the issue of greenium, the officials would discuss how much to mobilise through such bonds in FY24 and whether those would be raised quarterly or in the second half of the year. The fund mobilisation timing would depend on the utilisation of `16,000 crore mobilised recently, sources said.
The Centre’s gross market borrowing is pegged at Rs 15.43 trillion for FY24, an increase of 8.6% over the revised estimate of Rs 14.21 trillion for FY23. The borrowing calendar will be announced for the first half of FY24 after the meeting.
The premium of 2-4 bps was not even enough to cover the additional costs the issuer would incur on compliances such as certification, end-use monitoring and additional disclosures.
“Ideally, the difference in the funding cost (greenium) should be 25 to 30 basis points,” said Anil Gupta, vice-president at rating agency Icra
Currently, there is no specific mandate from financial sector regulators to financial institutions to invest in green bonds. When the objective is to maximise the risk-adjusted return, investors prefer high-yield G-Secs to sovereign green bonds as the risk is the same.
“If there is a specific mandate for financial institutions either from the government’s side or from the RBI, Sebi or other regulators that a certain portion of assets under management (AUM) has to be invested in green bonds or green assets, that will create demand. When the demand is created, green bond supply will also increase,” Gupta said.
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If demand-side issues are not addressed, the premium pricing or the discount on the green bond yields will not appear.
In November 2022, finance minister Nirmala Sitharaman approved a framework for the government’s maiden green bond issuance. It would focus on financing public projects across nine areas, including renewable energy, clean transportation, climate change, sustainable water and waste management and pollution control.
At the 26th Session of the Conference of Parties to the UNFCCC in Glasgow in November 2021, Prime Minister Narendra Modi
According to CEEW Centre for Energy Finance, India would need cumulative investments of $10.1 trillion to achieve net-zero emissions by 2070. Of this, $8.4 trillion would be required to significantly scale up generation from renewable energy and associated integration, distribution and transmission infrastructure. Another $1.5 trillion needs to be invested in the industrial sector for setting up green hydrogen production capacity to advance the sector’s decarbonisation.