India has finally decided to join the sovereign green bond rush. Last week, finance minister Nirmala Sitharaman said in her budget speech that the country is looking at selling a green deal, making India the first of the Bric nations to make this move. But the significance of the decision could be lost if the sovereign doesn’t remain open to borrowing from international markets.
GlobalCapital Asia understands India’s deal will most likely be denominated in rupees, and hit the market towards the middle of the year, with or without a green framework that is still in works.
India has long shied away from issuing bonds directly in the international market.
In July 2019, despite an announcement from Sitharaman in her maiden budget that India will raise as much as $10bn in offshore bonds, the plans eventually got shelved after getting caught in political crosshairs.
The arguments against a dollar bond have long been strong — the main being it exposes India to inflation risks as the central bank may have to print more money to purchase foreign currency to make good on its dollar maturities.
Critics of a sovereign bond have never failed to cite India narrowly escaping a default on its external balance of payment obligations in 1991, caused partly due to a sharp decline in the value of the rupee and a fall in the country’s foreign currency reserves.
Those arguments, however, don’t hold up quite as well this year given India stands on a much better economic footing.
The country’s foreign exchange reserves have piled up to $634bn — an all-time high — and now exceed India’s external debt of about $570bn at the end of June 2021. Also, despite a lot of uncertainties amid the pandemic, India’s inflation has remained in a steady range of 5% to 6%.
This means the sovereign can — and should — safely look beyond its own shores to raise funding.
Limited scope
By ignoring the potential of an offshore green bond, India could be making a big mistake. Even though globally ESG deals have flourished in the past year, Indian local green deal flow has been patchy.
The World Bank was one of the first issuers of green notes in rupees in 2015. The multilateral body printed a Rp348.5m ($4.7m) bond that was sold to Japanese retail investors.
In 2016, Hero Future Energies’ Rp3bn bond became India’s first certified climate bond. In March 2021, the company debuted offshore with a$363m six non-call three year green 144A/Reg S bond that gathered peak orders of over $3bn.
International companies have also experimented with green rupee bonds. For instance, Hong Kong-based CLP Group’s India arm raised Rp2.97bn from its debut green bond in October 2020 to fund its local wind projects.
On Monday this week, KKR-backed Virescent Renewable Energy Trust, an Indian renewable energy platform, raised Rp6.5bn in the domestic market.
Even though sporadic, local green bonds have been received well so far, meaning India’s green rupee bonds will no doubt get an equally strong response. But this raises a bigger question: can India scale up its local green bond market adequately?
Regulatory push will get many borrowers to start thinking of green bonds, but there is a big bottleneck that is waiting to strangle India’s green market — its local investors.
Demand for ESG assets has been a key factor in pushing up the volume of sustainable bonds globally. S&P Global Ratings estimates sustainable bond volumes — which include green, social, sustainability and sustainability-linked bonds — to surpass $1.5tn this year. Yet, Indian bond investors are nowhere ready for the change.
ESG-focused funds are almost negligible in India and there is no pressure on fund managers to push their capital towards green deals. A dramatic change in mindset is the need of the hour, especially if India is serious about its climate change ambitions.
Green targets
India has said that it plans to achieve net-zero status by 2070. While announcing this target in November 2021 at the United Nations Climate Change Conference (COP26), prime minister Narendra Modi also demanded $1tn in funding from rich countries to support poor countries in meeting their carbon-neutral targets.
To meet the 2070 deadline, India will need about $10tn in investments, according to estimates from Indian think-tank, the Council on Energy, Environment and Water Center for Energy Finance.
This means, billions of dollars need to be raised annually to fulfil India’s green ambitions.
The local bond market is unlikely to be able to plug that vast requirement. Neither will a mix of private funding and multilateral support be enough. Even India’s likely inclusion in the JP Morgan global bond index this year — which is estimated to bring in about $30bn in inflows — won’t move the needle significantly.
India needs to include the international bond market into its funding mix to meet its targets.
Its debut — whatever form and shape it takes — will be welcomed by global investors. Rated Baa3/BBB-/BBB- internationally, the sovereign has never gone offshore before. Its rarity value and diversification potential could help it get away with tight pricing.
If pricing is a big concern for the country, it can look to leverage top-notch ratings of better-rated peers to borrow money at dirt-cheap levels.
Take the example of Sindicatum Renewable Energy Company. In 2018, the Singapore-based developer, owner and operator of renewable energy projects, raised Rp2.5bn in green bonds, backed by an unconditional and irrevocable guarantee from GuarantCo, a private infrastructure development group.
The guarantee covered the entire principal and interest of the notes, bumping up its ratings to A1 by Moody’s and AA- by Fitch — and lowering the cost of the seven year deal.
Multilaterals like the Asian Development Bank also provide guarantees in lieu of a small fee. India could consider such options too to tap the deeper liquidity pool of global ESG investors.
Indian borrowers have already established the benefits of going international. In 2021, Indian companies raised a record $8.2bn from offshore ESG bonds, the strongest volumes since 2015 when the first green bond was raised from the country.
It’s time the Indian sovereign jumps on the bandwagon.