green bonds: currency turmoil could jeopardize the sale of sovereign green bonds

India is likely to face an uphill battle if it makes its first sovereign green bond sale, as it aims to issue the securities in rupees, putting off most foreign investors.

Political opposition to borrowing in dollars means the nation will have to largely abandon the global funds that have propelled ethical debt into a $4 trillion market and rely on local buyers. India’s lack of ESG funds means the government is hoping the same banks, insurers and asset managers it will tap into for its record borrowing this year will have enough appetite for its green bonds.


Indian Finance Minister Nirmala Sitharaman revealed the government’s plan to sell the securities in the second half of the year when announcing the budget on February 1. While a number of companies in the region have issued green debt, only Hong Kong, Indonesia and South Korea have so far sold green sovereign bonds, according to data compiled by Bloomberg.

The timing may not be ideal for India, especially for a rupee issue.

The currency has fallen more than 4% this year on fears the Reserve Bank of India is lagging behind in tackling inflation, with high crude oil prices adding to pressures on the net importer. The central bank is expected to catch up in the coming months, raising its benchmark repurchase rate to 5.5% by the end of the year from the current level of 4.4%, according to a Bloomberg survey.

“The RBI rate hike cycle is significantly reducing the appeal of rupee-denominated assets” as tighter policy pushes local bond yields higher, said Nivedita Sunil, fund manager at Lombard Odier Investment Managers in Singapore. “As an off-benchmark item, there would be limited appetite for India’s sovereign green bond.”

The lack of Indian funds dedicated to investing in green assets means local investors are likely to treat the issuance the same as conventional bonds, said Sandeep Bhattacharya, Indian project manager for the Climate Bonds Initiative in Mumbai. . This will likely reduce the potential for any greenium, a premium on sustainable debt, he said.

One of the reasons India might turn to green bond issuance is to help broaden its funding base as its borrowing needs grow. The government announced in April an expected record issuance of 14.3 trillion rupees ($184 billion) of debt this financial year.

“Given the funding pressures they face, they are likely looking to new markets to diversify,” said Kenneth Akintewe, head of Asian sovereign debt at abrdn in Hong Kong. At the same time, “it’s good to see a country always at the forefront when looking at these markets,” he said.

There are many incentives for India to turn to issuing green bonds to finance environmental projects. The country has been plagued by record heat waves in recent weeks, adding to concern that it is one of the most exposed to climate change. The nation has, however, been criticized for dragging its feet on its emissions reduction commitments, setting the longest deadline for net zero among the world’s largest economies.

Garland K. Long