Devolvement Of Sovereign Green Bond Shows Lack Of Interest, Green Premium

Friday's green bond auction on underwriters shows low demand and absence of green premium in the market, five people with knowledge of the matter told NDTV Profit.

Of the Rs 5,000 crore auction, the Reserve Bank of India accepted Rs 1,502 crore at a coupon of 6.79% and had to devolve nearly Rs 3,500 crore on primary dealers. The coupon, which was at par with the yield on the benchmark 10-year gilt, shows a lack of interest among investors.

The government typically demands a 'greenium,' or green premium, from investors due to the bond's impact on sustainability.

Usually, the government expects the cut-off on such bonds to be a few basis points lower than the benchmark paper, as a green bond should enjoy a premium over plain vanilla bonds. Meanwhile, in today's case, market participants were expecting the bond to be issued at 2-3 basis points lower than the benchmark paper.

However, the fact that the sovereign green bond auction failed to generate adequate interest reflects that the environmental, social, and governance market has not yet evolved in India, a source in the know said.

"This week’s Rs 5,000 crore issuance marks a critical turning point. The cut-off yield of 6.79% highlights a tight pricing environment," said Venkatkrishnan Srinivasan, founder at Rockfort Fincap.

This is the first time that the RBI has devolved a sovereign green bond auction.

In May, the government cancelled its first sovereign green bond auction of Rs 6,000 crores due to an inadequate green premium. The subsequent auction in July saw demand for Rs 1,697 crore being accepted against the targeted Rs 6,000 crore as the government was unwilling to compromise on pricing.

The reason why there was less demand for today's green bond auction was also because there is no mandate for any investor to invest in such papers at a lower yield. Another issue is the liquidity of such papers, as they are not traded as much in the secondary market.

Going forward, the government might have to cancel its green bond auctions if demand continues to remain weak, or the government must bring in some incentive for investors to start bidding at a lower yield, another source in the know said.

What market participants believe is that insurance companies and other long-term investors could lap up such papers given the government brings in longer-tenure green bonds for offer, as the five- or 10-year green bonds targeted towards banks are not lucrative, the third source said.

The upcoming tranches of Rs 5,000 crores each in December, January, and February will test the government’s ability to sustain its strategy, Srinivasan said.