New Delhi: India is gearing up to increase the sale of green bonds this fiscal year to fund sustainable infrastructure projects, according to sources familiar with the matter. This move comes amidst heightened global interest in Indian government securities.

Sources, speaking on the condition of anonymity, disclosed that the government, having already earmarked Rs.12,000 crore for green bonds in the first half of fiscal year 2025, is considering borrowing a total of Rs.20,000 crore to Rs.25,000 crore through such bonds for the entire year. The plan to issue green bonds, which is part of the government's broader borrowing program, is likely to be announced in the full-year budget scheduled for presentation in July.

In the preceding fiscal year, the government had issued sovereign green bonds worth Rs.20,000 crore, although this was not explicitly mentioned in the budget. These included bonds worth Rs.5,000 crore with a five-year tenure sold in November 2023, and Rs.10,000 crore worth of bonds with a 30-year tenure in two tranches of Rs.5,000 crore each in January and February 2024. An additional Rs.5,000 crore worth of bonds were sold in March.

According to one of the sources, borrowing through green bond instruments in the current fiscal year (2025) is expected to surpass the previous year's levels due to market demand for sustainable bonds.

In a significant development on 5th March, Bloomberg Index Services announced the inclusion of 34 Indian government bonds in its Emerging Market Local Currency Index effective from 31st January next year. Similarly, in September 2023, JP Morgan had declared the addition of 23 Indian government bonds to its widely followed emerging market debt index, starting from 28th June 2024. However, investors seemed to have already shown interest in these bonds even before the decisions took effect. According to a report by Mint on 8th March, foreign portfolio investors' (FPIs) assets under custody surged by Rs.77,379 crore between September and February.

"The inclusion of Indian bonds in these indexes is expected to attract more foreign investments, which gives us confidence that green bonds will garner greater interest," the source added.

The finance ministry spokesperson declined to respond to an emailed query.

Green bonds serve as a means to finance renewable energy projects. With numerous financially viable projects in the public sector in the pipeline, policymakers believe that funds raised through green bonds will be readily utilized.

Experts note that while sovereign green bonds previously had minimal greenium (the premium investors are willing to pay for environmentally friendly investments) over other government bonds, it is anticipated to be higher this year (2025) due to increased interest from foreign portfolio investors and the strategic timing of issuance.

"Major traders, including foreign banks, Indian commercial banks, and primary dealers, are expected to display a strong interest in acquiring green bonds to meet the rising demand from FPIs and the expected repo rate cut by the central bank in the current fiscal year (2025)," said Venkatakrishnan Srinivasan, managing partner at Rockfort Fincap Llp, a financial advisory firm.

"Given the potential surge in FPI interest, there are speculations that the government may increase green bond issuances in the latter half of the fiscal year to accommodate this demand," Srinivasan added.

"In summary, this move by the Indian government reflects a strategic approach to tap into the increasing demand for environmentally sustainable investments, capitalizing on heightened FPI interest and favorable market conditions," he concluded.

On 12th April, the yield on the Indian 10-year government bond was trading at 7.179%. The yield had seen an increase in recent months as central banks, especially in advanced economies, kept their interest rates unchanged, affecting the demand for emerging market bonds.

Funds raised through the sale of green bonds cannot be utilized for projects related to fossil fuel extraction, production, or distribution, or nuclear power. However, they can be used for government investments, subsidies, grants-in-aid, tax foregone, or operational expenses to support climate mitigation and sustainable green initiatives aimed at reducing carbon intensity.