India enters green bond market with US$1b debut auction

India’s first sovereign green bond will go to auction on Wednesday (Jan 25), and policymakers have laid the groundwork to ensure a successful debut. 

Authorities have promoted the 80 billion rupee (S$1.3 billion) issue to the country’s biggest domestic asset managers, including state-run insurers and pension funds as well as foreign investors. The insurance industry regulator will allow the bonds to count towards insurers’ required infrastructure investments. Banks can use it towards mandatory government holdings, and there is no limit for foreign buyers. 

“We expect strong demand for India’s first issuance of sovereign green debt from both domestic as well as foreign portfolio investors,” said Parul Mittal Sinha, head of India financial markets at Standard Chartered in Mumbai. Nomura Holdings and Barclays said the same. 

This offering will be sold in 5-year and 10-year tenors via a uniform price auction on Wednesday; a second, similar offering is set for Feb 9. Its proceeds will be used for unspecified projects that align with India’s green bond framework.

Together, they make a modest trial balloon for the country’s broader goals for green finance. Prime Minister Narendra Modi has ambitious plans for renewable energy and projects that bolster the country’s resilience to extreme weather and higher temperatures, and India has said it hopes issuing green bonds will enable it to raise money at relatively lower costs. 

That will be more challenging. Greeniums – discounted rates for environmental projects – have been shrinking globally. Thailand’s sustainable bond issuance in September was priced at a coupon 8 basis points lower than comparable Thai bonds. Bank analysts, along with traders interviewed by Bloomberg, expect India’s inaugural sale to yield a smaller greenium of 2 to 3 basis points. Thailand’s 3.39 per cent 2037 sustainable bond is due for a reissue on Wednesday.

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Part of the reason may be a tepid reaction from the global market. The bonds will be issued under the “Fully Accessible Route,” which allows unlimited holdings by foreigners, but some foreign investors may be put off by currency risks. The Indian issue also allows proceeds to be used for compressed natural gas in public transport, which may limit appeal to some green investors. 

Asia’s third-largest economy will need to lean more on local investors, who may be unwilling to pay extra for a green issuance. The South Asian nation does not have any domestic green-dedicated debt funds. “There is no ready mandate for domestic entities to buy green bonds and there is a need to create awareness about it,” said Naveen Singh, head of trading at ICICI Securities Primary Dealership.

Indian companies typically issue green bonds on the offshore market, where demand has been robust. A recent US$1 billion issue by the Export-Import Bank of India was oversubscribed by more than 100 per cent.

“We expect demand from foreign portfolio investors (FPI) to increase over time as more ESG non-resident funds get set up with local currency mandates, and obtain FPI licence to invest in debt markets in India,” StanChart’s Sinha said.

If this sovereign auction is oversubscribed and the cut-off yield materially lower than regular government bonds, it would encourage larger green issuance next year. 

“The government is testing waters by issuing a rupee green bond,” said Ashhish Vaidya, head of treasury at DBS Bank in Mumbai. “It will be interesting to see whether the global green pool of funds are willing to invest in a INR issue.” BLOOMBERG