The Indian government’s sovereign green bond programme is facing challenges in achieving its issuance targets and capturing the greenium premium over regular government bonds. The auctions in the current fiscal year have highlighted the difficulty in balancing market forces, policy decisions, and investor sentiment to build a sustainable green bond market in India.
Initial auctions this year faced issues with calibrating yields and attracting robust demand. The government prioritized greenium over subscription in a May 2024 offering, signaling a commitment to price discipline. However, subsequent auctions in July and November revealed tepid investor appetite and even devolvement on primary dealers, raising concerns about market confidence and liquidity.
The fragmented liquidity of sovereign green bonds, with smaller issuance sizes and lack of institutional mandates, has hindered market depth and secondary market trading volumes. Without dedicated green funds or regulatory incentives for green investments, price discovery challenges persist, reflecting a tug-of-war between the government’s pricing strategy and market demand.
To foster a vibrant green bond market, policymakers should consider interventions like mandating institutional investment in green bonds, including green bonds in SLR requirements for banks, offering tax incentives for retail investors, and including green bonds in ESG indices for passive inflows. Building awareness and highlighting the alignment of green bonds with climate goals through targeted investor outreach can also boost demand.
As the government prepares for the final tranches of this fiscal year, the success of these auctions will be crucial in gauging market appetite and the effectiveness of strategic adjustments. Despite challenges, the government’s commitment to mobilizing green capital underscores India’s ambition to become a global climate leader.
In conclusion, the journey of India’s sovereign green bond programme reflects the complexities and opportunities in developing a sustainable finance market. By addressing liquidity issues, enhancing demand through targeted interventions, and aligning with global ESG trends, India can establish itself as a key player in the green finance space.
