Name is bond, green bond

The first of two tranches of India‘s maiden ₹16,000 crore sovereign green bond issue this week sailed through on domestic interest at coupon rates 5 and 6 basis points (bps) lower than gilts of 5- and 10-year tenors. Bond buyers, principally banks and insurance companies, did not have to be cajoled into paying the slight premium over comparable government bonds despite the absence of a pool of green capital in the country. Insurers have been allowed to treat these bonds as infrastructure investments. Banks, however, did not get any of the liquidity requirement exemptions sought. Relaxed curbs on investment by foreign bond buyers drew a lukewarm response with the premiums on the bonds not being deep enough for rupee-denominated debt.

India’s green bond market will have to mature before it draws in significant international capital designated for environmental, social and governance (ESG) lending. Domestic issuance has lagged because of a lack of mandate to creditors and hazy definitions of sustainable projects. Governments are pushing the agenda on green lending, and India has done well to join the club of sovereign issuers. Masala green bonds, issued in rupees, offer designated ESG capital higher returns than it can access in developed markets. India’s sovereign issue serves as a marker for foreign bond buyers to establish a local presence.

Domestic financial institutions will have to build critical mass in the green bond market. Sustaining their interest in pricier gilts may involve some tax or other regulatory requirements. Alongside, a pool of green capital needs to be grown so that sustainable development benefits from cheaper credit. Equity financing has a higher ESG quotient that the bond market should aspire to. The government has made a strong case for green capital; it should now address taxonomy issues that cloud its deployment. Greenwashing of projects has justifiably come in for increased scrutiny.