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Government, RBI Discuss Merits Of Green Bond Issue When 'Greenium' Is Low

Greenium is the pricing of green bonds, where the funds raised are meant to be used specifically for sustainable projects.

<div class="paragraphs"><p>(Source: rawpixel.com on Freepik)</p></div>
(Source: rawpixel.com on Freepik)

The government is in discussion with the Reserve Bank of India about the merits of the issue of sovereign green bonds and whether the low or negligible ‘greenium’ justifies the higher compliance for such issuances, including the use of funds, according to a person with knowledge of the development, who spoke to BQ Prime on the condition of anonymity. 

There are questions on whether greeniums will persist and why should the debt authority pay higher yields and bind themselves to the use of funds if there is no greenium available, the person quoted above said. 

A 'greenium' is the favourable pricing that is available for green or climate bonds, where the funds raised are meant to be used specifically for sustainable projects. The investor agrees to a greenium on a bond because of the sustainable use of such funds. There are also some dedicated climate and impact funds and investors who look to invest in such bonds, which further helps the pricing of such bonds. 

The issuance of green bonds was first announced in the Union budget 2023 with the specified objective that the proceeds of such bonds would fund public sector projects that help decrease carbon footprint. A detailed framework on green bonds was later released. 

Subsequently, the RBI issued green bonds worth Rs 160 billion in 2022–2023, in two tranches. However, after lots of enthusiasm in the build-up, the greenium declined to just 1 basis point over similar government bonds in the second tranche, as compared to 6 basis points in the first tranche. 

In case, there is no greenium on offer, should the RBI, as the debt management authority for the government, even go through with the borrowing, the person quoted above questioned. 

In such a scenario, where the RBI decides to accept a green bond issue pricing that carries no greenium, the rationale is also unclear—whether it is to create a benchmark or is it actually doing it from a prudent debt management perspective, the person said.

The tightening monetary policy conditions in India and a similar hike in policy rates by global central banks have further contributed to an overall rise in borrowing costs for the Indian government. This has led to questions about whether there is any merit in issuing green bonds, which carry an additional burden of compliance, although Finance Ministry officials have indicated that such bonds are part of the borrowing mix for 2023–24. 

However, even as the issuance of such green bonds again in the coming financial year helps maintain continuity and builds credibility for such borrowing, the RBI and the government are also taking a hard look at whether markets are ready to give the greeniums for such bonds, the person said. 

If there is no greenium, then there is no advantage—even from the perspective of creating a benchmark for green bond issuances by other companies in the country, the person said. If they are priced higher, then it is detrimental to the overall debt cost, he said.

By issuing a green bond, the government effectively supported the creation of a green bond market in the country, with private companies now having a sovereign benchmark against which they can price their own green bond issues. The move was also aimed at pushing banks and borrowers to support more sustainable projects that will also help India as a country work towards its commitments on climate change.

T Bijoy Idicheriah is a senior financial journalist who has been writing on the world of banking and central banking for 17 years.