India's Maiden Green Bond Likely To Be Anchored By Local Investors

The Indian central bank on Wednesday will conduct auctions for the country's maiden pair of sovereign green bonds worth Rs 8,000 crore i.e. Rs 4,000 crore each for bonds with a five-year and 10-year maturity period.

The Indian Finance Ministry and Reserve Bank of India have extensively engaged with both domestic and foreign investors but the first round of issuance is likely to see demand driven by local investors such as insurance companies and banks, according to industry experts BQ Prime spoke with.

While there are no investment funds with a dedicated green mandate in India, overseas investors that do may wait and see how the first few auctions play out, a private banker told BQ Prime, on the condition of anonymity.

Some interested foreign investors may even wait to see if a proper secondary market for such bonds develop before jumping in, they said.

The Insurance Regulatory and Development Authority of India has allowed insurance companies to treat investments in sovereign green bonds as infrastructure investments, according to a Jan. 13 circular. Similarly, banks have been allowed by the RBI to treat these bonds as mandatory holding of government securities and foreign investors will not be subject to a cap on their investment in such bonds.

"My take is that this should go ahead like any other normal bond issue, which RBI has been doing regularly," Ajay Manglunia, managing director at JM Financial, said. Yields might be more or less similar but if there is foreign participation, they might travel downwards a little bit, he said.

The global market for green bonds has evolved and grown significantly over the last decade, but there's really little to no demand for such bonds domestically, a second private banker said on the condition of anonymity.

Since 2010, the International Finance Corp.—a part of the World Bank group— has alone issued $10.5 billion worth of green bonds. Over 80% of these bonds were denominated in U.S. dollars (62.8%), Swedish krona (10.6%) and the British pound (7.4%).

"The demand is fairly strong abroad, given that there are institutional mandates per se that force the asset manager to actually consider green norms in their investment," Rajeev Radhakrishnan, head of fixed income at SBI Funds Management, told BQ Prime. Given that this is the first issuance for sovereign green bonds in India, Radhakrishnan said he was unsure about how much foreign demand will actually come in.

"You have to consider the currency angle also," he said, noting that there has been a dearth of foreign investors in India's debt market over the last two years either way. So, it remains to be seen whether green bonds will be able to move the needle on that, he said.

This dominance of dollar debt in green bonds is also part of the reason why even Indian renewable power companies have chosen to issue dollar-denominated bonds in the past, according to the second private banker quoted above.

Green bonds—issued by governments or corporations— in dollars or other hard currencies, typically enjoy a premium of 20-25 basis points on their yield over normal bonds of a comparable tenor, according to Aditya Gore, head of international coverage at Nuvama Fixed Income Advisory.

"This is a function of there being a mandated pool of money which tracks ESG funds," he said.

The premium, also called 'greenium', for India's sovereign issuance is likely to hover around 5-10 basis points, Gore said. The issuance, though, will certainly be a step towards sensitising the Indian market towards green bonds and help develop a market in the future, he said.

"Over time, the SGBs would provide a pricing reference for the private sector entities in India for their INR-denominated borrowing for ESG-linked debt," M Rajeshwar Rao, deputy governor at Reserve Bank of India, said in a public speech in December 2022.

Benchmarks emerge when you keep issuing regularly at different tenors and with significant appetite, Manglunia said. Since this is only the first issuance, it's hard to say yet whether the SGBs will emerge as a benchmark, he said.

In order to attract more foreign investors, the government may even have to provide more granular details on how it plans to use the proceeds as opposed to an umbrella of projects it could be used for, according to the first private banker quoted above.

The next tranche of Rs 8,000 crore worth sovereign bonds will go under the hammer on Feb. 9.

For now, experts concurred that while the maiden issuance is something of a test balloon for the government and investors alike, it could very well lay the foundation for deepening India's green bond market.