India will allow foreign investors to directly trade sovereign green bonds through the International Financial Services Centre in Gujarat International Finance Tec-City in a bid to deepen the market as the country plans to issue more securities to meet its sustainable goals.
Reserve Bank of India governor Shaktikanta Das said on April 5 that the central bank aims to facilitate "wider non-resident participation in sovereign green bonds", and is looking to announce a related investment and trading scheme through GIFT City soon.
India has stepped up efforts to decarbonise its economy as it aims to become a net-zero carbon emitter by 2070 and meet half its energy requirements from renewable sources, with plans for 500GW of installed renewable energy capacity by 2030, up from 157GW in 2022.
The government plans to raise Rs120bn (US$1.5bn) from 10-year sovereign green bonds by the end of September as part of its Rs7.5trn borrowing programme. It raised Rs200bn from green bonds in the fiscal year to March after printing Rs16bn when it first introduced the ESG instruments in fiscal 2022–23.
India has also been taking steps to make green government bonds more attractive to long-term investors such as pension funds and insurers, introducing 30-year tranches in 2023–24. In January 2023, insurance companies were allowed to count green bonds as infrastructure investments in their portfolios.
Sovereign green bonds already qualify under the country's fully accessible route, under which there are no restrictions on the amount non-residents can buy. However, investors still need to obtain a foreign portfolio investor licence under the FAR, a cumbersome process that involves registering with the market regulator, declaring the end-holders of securities and disclosing tax details. The process takes around two to three months.
Under the proposed GIFT City route, foreign investors without an FPI licence will be allowed buy green securities in primary auctions and the secondary market, according to sources aware of the development. The RBI is yet to announce final details.
An approach being discussed would allow full capital account convertibility, enabling foreign investors to buy rupee-denominated sovereign green bonds but settle the transactions in US dollars, according to a source aware of the development. That means investors would take the currency risk, not the government.
Market participants have welcomed the move as they expect foreign participation will increase.
"If foreign investors are allowed to invest in the sovereign green bonds through GIFT City directly, with the settlement in dollar format, it makes the product more appealing for offshore investors with green mandates," said Naveen Singh, head of trading at ICICI Securities Primary Dealership.
Foreign investors own less than 2% of Indian sovereign green bonds, dealers said, about the same as conventional domestic government bonds. Offshore ownership of sovereign green bonds is in double digits for emerging market countries like Brazil and Indonesia as they issue green bonds in US dollars. India has never issued US dollar sovereign bonds to avoid currency risk.
Investors look to India
Global funds are expected to invest more in India as it nears inclusion in major emerging market indices. Bloomberg is due to include Indian government bonds in its Emerging Market Local Currency Indices from January following JP Morgan's inclusion of the country in its widely tracked emerging markets bond index from this June.
GIFT City institutions, including the India International Exchange, India International Clearing Corp and the depository there, will be responsible for currency conversion and settlement, according to the source close to the development.
Foreign investors will be able to trade and invest in sovereign green bonds from IFSC, "thereby offering trading and settlement of these bonds outside the domestic settlement system", said Deepak Sood, head of fixed income at asset management firm Alpha Alternatives.
The scheme for investment will be announced within three months, according to the source. RBI and IFSC did not respond to emails seeking confirmation.
India has Rs360bn of sovereign green securities across five, 10 and 50-year tenors. However, the greenium of 4bp–6bp seen in the first two auctions for the five and 10-year tranches disappeared because demand from banks and insurers diminished in subsequent deals.
The five-year and 10-year green bonds are trading at 7.106% and 7.109%, respectively, compared with conventional five-year and 10-year benchmarks at 7.079% and 7.116%, according to LSEG data.
“RBI’s move will help in deepening the green bond market, and also help in increasing the greenium/premium because currently there is rarely any trading happening in green bonds," said Singh at ICICI Securities.
The greenium will improve because "the investor pool will be bigger, as small investors and even high-net-worth individuals, who do not want to get registered as FPIs, but want rupee government bond exposure, will be able to buy," said the head of fixed-income and forex trading at a private bank.