India’s Green Bond Market at Just 3.8 % of Overall Domestic Corporate Bond Market

The green bond market in the country accounts for only 3.8 % of all outstanding corporate bonds exceeding USD 500 billion, say market reports.

As per media reports, Fitch Ratings said that as of January 2023, GSSS (Green, Social, Sustainability and Sustainability-linked Debt) bonds accounted for USD 20 billion or 3.8 % of the country’s overall corporate bond market while the government bond market is more than double this size.

The reports  stated that issuers are concentrated in the energy sector, and particularly renewable energy from solar projects making the domestic green bond market  small.

Another reason mentioned in the report for the low base of  green bonds is  that they are all denominated and held in the rupee by domestic banks, insurances, and the Reserve Bank of India (RBI). However, the vast majority of issuers (as much as 90%) prefer issuing GSSS bond in dollars.

The RBI, which issued sovereign green bonds worth Rs 16,000 crore in two equal tranches, on January 23th and 9th February, can be observed.

Fitch believes that  the maiden issue reflects increasing policy focus on domestic financing for climate adaptation and mitigation. Fitch also believes that domestic investors will hold these bonds largely due to the national climate policy’s incentives.

The sovereign green bonds’ proceeds will be used to finance projects that achieve the decarbonisation goals, including net-zero emission by 2070, decreasing the GDP’s emissions intensity by 45% by 2030, and increasing non-fossil fuel energy sources to 40% by 2030.

In October 2022, the country’s sovereign green-bond framework outlined how proceeds from green bonds would be used to fund projects such as renewable energy, energy efficiency and sustainable water and waste management.

Domestic issuers have many problems accessing the capital market. These include low credit ratings, low credit guarantees and low investor demand,observed report.

The report listed out many difficulties domestic issuers face in accessing the domestic capital market such as low credit rating, lack of credit guarantees, and low investor demand for local bonds.

This has led to a shallow domestic sustainable debt market in contrast to the large amount of infrastructure capital being allocated to renewable energy, which in FY22 stood at USD 14.5 billion, it added.

Renewable generation will see an annual average growth of 8.7 per cent between FY22 and FY32, it pointed out. It further added that new manufacturing policies, especially the PLI scheme that seeks to boost domestic manufacturing of wind turbines and solar components, and other incentives will spur further GSSS debt issuances.

Even though the maiden sovereign green bond sale was successful, Fitch noted  that for the segment to gain more traction, more structural changes are needed towards improving financing conditions by offering public-sector credit guarantees to lower financing cost, or increased default protection for investors through credit default swaps.

Over the past five years, Indian renewable energy (RE) companies have relied on global bond markets to raise green bonds at attractive rates and open up domestic funding lines for new projects. Since 2014, Indian renewable energy developers have raised USD 15.5 billion in green bonds from international markets. The global rise in interest rates has, however, resulted in a decline in bond issuance for the current fiscal year. This year, has issued an auction of two green bonds.