Few takers for sovereign green bonds as investors seek to avoid lower yields

When the Reserve Bank of India (RBI) auctioned two new SGrBs worth Rs 10,000 crore in November and January, bonds valued at Rs 7,443 crore remained unsold and were devolved to primary dealers as investors sought high yields. This came despite a rule change allowing NRIs and foreign portfolio investors to participate without restrictions.

SGrBs are issued by the Union government to fund green investments, mainly for producing electric locomotives and implementing metro projects. Without a ‘green premium’, these bonds offer no financial advantage over regular bonds, making them less attractive to issuers. The government has yet to secure any significant green premium on SGrB issues. “At times it is 2-3 basis points, at times it is nothing. But we do not want to judge that issue. Some people have not come forward, maybe tomorrow they come forward, maybe foreign investors come forward,” Seth said.

In August 2024, RBI accepted only Rs 1,697 crore in bids for a Rs 6,000 crore SGrB auction, and in May, it withdrew another

Rs 6,000 crore auction altogether. Small issue sizes, along with investors holding on to SGrBs until maturity, have further dampened secondary market trading and made the security increasingly illiquid. “There was a double whammy, small issuance and that issuance also disappearing into held-to-maturity books. There is no secondary market for these bonds. It has become like loans,” said Vikas Goel, industry veteran and former CEO of PNB Gilts Ltd.

Globally, the green premium has been in the single digits, like 7 or 8 basis points (bps), Seth said. “But as long as it is a high single digit, one can still say (it is) worth a case. But if it is 2-3 bps, then it is not having the intention. That’s how you find that amounts are not increasing, but we have to wait and see where this product develops,” he added. “There is no natural buyer who is forced to buy these green bonds. We don’t have social impact funds, we don’t have responsible investing, we don’t have a sustainable finance market in our country. There is absolutely no incentive for anybody to buy these bonds at 5, 10, or 15 bps lower,” Goel said.

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. The government first issued SGrBs in 2022-23, raising Rs 16,000 crore. It secured another Rs 20,000 crore in 2023-24 and has raised Rs 16,697 crore so far this financial year, with a Rs 5,000 crore issue planned for later this month. The government typically uses roughly 50 per cent 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. In 2025-26, schemes eligible to receive SGrB proceeds require Rs 25,342 crore. The expected amount to be raised from SGrBs in the next fiscal will be notified separately, according to Budget documents.

Manish K Shrivastava, associate director at The Energy and Resources Institute (TERI), said India can 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.

“There are examples where green bonds issued by governments in developing countries have been backed or guaranteed by the credit ratings of multilateral institutions like IFC or the World Bank. That increases investor confidence,” Shrivastava said.