Cost Of Capital On Green Bonds May Not Get Cheaper, Says NIIF

The cost of raising funds for corporates through green bonds is not likely to get cheaper, according to Akhilesh Tilotia, head of research at National Investment and Infrastructure Fund.

Global investors are keen on India’s transition to green energy and are pouring in funds for such initiatives. However, the funds raised through green bonds have “very limited” green premium, Tilotia said in an interview with NDTV Profit.

“The pricing at which funds will get raised whether the debt funds or equity, I don’t think there is a significant discount that will be available for people,” he said.

“Large pools of global capital are very interested in India becoming successful in its green transition… When we look at green opportunities, we see more access to capital, not necessarily cheaper cost of capital,” he added.

Green bonds are debt instruments designated to finance environmentally friendly projects. Green premium, or greeniums, refer to the pricing advantages of green bonds because investors are prepared to pay more or accept lower yields because these count towards sustainable financing.

The interest rate offered on green bonds are either lower or at par with the prevailing market rates. “There is very limited, if any, green premium. It’s not as if you can raise green bonds at significant discounts to what the prevailing market rate is,” Tilotia said.

In India, the regulators and the government have been pushing for green bonds as a source of funding for sustainable projects. However, lack of liquidity in the segment as well as limited investor base has hampered the efforts towards climate financing.

In January 2023, Indian government issued sovereign green bonds for the first time worth Rs 8,000 crore in two equal tranches of 5- and 10-year tenors. The cut-off yield on 5-year tenor was at 7.10%, and 7.29% for the 10-year tenor. Both the tranches were priced inside the yield curve, obtaining a greenium. The yield on the benchmark 10-year government bond stood at 7.33% on the day.

The next month in the same year, the cut-off yield on two tranches of sovereign green bonds each worth Rs 4,000 crore stood at 7.23% for 5-year tenor and 7.29% for 10-year tenor. Both the bonds remained inside the yield curve, meaning the government got cheaper financing for this round of funding too.   

In November, the government raised Rs 5,000 crore through 10-year green bond at cut-off price of 7.25%, as compared with 7.29% for the benchmark bond. In December, another round of fundraising of Rs 5,000 crore was conducted at the cut-off price of 7.24%, as compared with 7.23% for the 10-year benchmark bond.

The government is expected to issue sovereign green bonds during the second half of FY25.

India’s macroeconomic conditions are conducive for global investors to pour in funds towards green projects, Tilotia said.

He expects limited depreciation in the Indian rupee against the U.S. dollar in the ongoing year. This, along with low interest rate differential with the U.S. makes it lucrative for global investors to allocate their funds into Indian assets, he said.