Currency turmoil risks undermining India's debut sovereign green bond

The currency has slumped more than 45 this year amid concern the RBI is behind the curve in tackling inflation, with elevated crude oil prices adding to pressures on the net

India is likely to face an uphill battle if it goes ahead with its first sovereign green bond sale as it aims to issue the securities in rupees, putting off most overseas investors.

Political opposition to borrowing in dollars means the nation will have to largely forsake the global funds that have boosted ethical debt into a $4 trillion market, and rely on local buyers. The absence of Indian ESG funds means the government will be hoping the same banks, insurers and asset managers that it will tap for its record borrowing this year will have enough appetite left over for its green bonds. 

India’s Finance Minister Nirmala Sitharaman revealed the government’s plan to sell the securities in the second half of the year when announcing the budget on Feb 1. While a number of companies in the region have issued green debt, only Hong Kong, Indonesia and South Korea have so far sold green sovereign bonds, according to data compiled by Bloomberg.

The timing might not be ideal for India though, especially for a rupee issuance.

The currency has slumped more than 4 per cent this year amid concern the Reserve Bank of India is behind the curve in tackling inflation, with elevated crude oil prices adding to pressures on the net importer. The central bank is forecast to play catch up in coming months, raising its benchmark repurchase rate to 5.5 per cent by year-end from the current level of 4.4 per cent, according to a Bloomberg survey.

“The RBI rate-hiking cycle significantly reduces the appeal of rupee-denominated assets” as tighter policy pushes up local bond yields, said Nivedita Sunil, a fund manager at Lombard Odier Investment Managers in Singapore. “As an off-benchmark item, there would be limited appetite for India’s sovereign green bond.”

The absence of Indian funds dedicated to investing in green assets means that local investors will probably treat the issuance the same as conventional bonds, said Sandeep Bhattacharya, India project manager for the Climate Bonds Initiative in Mumbai. That’s likely to reduce the potential for any greenium, a premium on sustainable debt, he said.

Part of the reason India may be turning to green bond issuance is to help broaden its funding base as its borrowing needs increase. The government announced in April a record planned issuance of 14.3 trillion rupees ($184 billion) of debt this financial year.

“Given the funding pressures they are facing, they are probably looking for new markets to diversify,” said Kenneth Akintewe, head of Asian sovereign debt at abrdn in Hong Kong. At the same time, “it’s good to see a country still on the front foot looking at these markets,” he said. 

There’s plenty of incentives for India to turn to green bond issuance to fund environmental projects. The country has been gripped by record-breaking heatwaves in recent weeks, adding to concern it’s one of the most exposed to climate change. The nation though has been criticized for dragging its feet on commitments to curb emissions, setting the longest deadline for net-zero among the world’s biggest economies.