India’s Sovereign Green Bonds: Challenges and the Path Forward

Introduction

India has issued Sovereign Green Bonds (SGrBs) to finance its transition to a low-carbon economy. These bonds are meant to raise capital for renewable energy, climate resilience, and environmental sustainability projects. However, investor demand has been weak, limiting their effectiveness in securing lower borrowing costs (greenium) and leading to funding shortfalls for key green initiatives, such as grid-scale solar projects.

With limited market interest, the government has had to depend on general revenue to cover the funding gap, which goes against the primary purpose of green finance. Addressing this challenge requires improving liquidity, enhancing transparency, and diversifying bond instruments to attract investors and strengthen India’s green finance ecosystem.

Understanding Sovereign Green Bonds

Sovereign Green Bonds are debt instruments issued by the government to fund projects that contribute to environmental sustainability. The Government of India established a framework for their issuance in 2022, aligning with global green finance standards.

These bonds support projects that help reduce carbon emissions, improve energy efficiency, develop renewable energy infrastructure, enhance climate resilience, and promote afforestation.

Since 2022-23, India has issued SGrBs eight times, raising approximately ₹53,000 crore for various green projects. In the 2024-25 budget, funds from SGrBs have been allocated to electric locomotive manufacturing, metro rail projects, renewable energy (including the National Green Hydrogen Mission), and afforestation under the National Mission for a Green India.

Despite these efforts, India’s green bond market has failed to attract significant investor interest, limiting the benefits of lower borrowing costs.

Challenges in India’s Sovereign Green Bond Market

Weak Investor Demand and Limited Greenium

India’s SGrBs have struggled to achieve a meaningful greenium. While green bonds globally secure 7-8 basis points (bps) greenium, India’s bonds have only achieved 2-3 bps. This limits the government’s ability to lower borrowing costs, making SGrBs a less attractive financing tool.

Even after relaxing investment rules for foreign investors, auctions have seen low participation, with primary dealers often absorbing unsold bonds.

Liquidity Constraints in the Secondary Market

The small issue size of Indian green bonds, combined with investors preferring to hold them until maturity, has limited secondary market trading. This lack of liquidity reduces the attractiveness of SGrBs for institutional investors who require an active bond market.

Lack of an Impact-Driven Investment Ecosystem

In developed markets, demand for green bonds is driven by social impact funds and responsible investment mandates. India lacks a well-established ESG (Environmental, Social, and Governance) investment ecosystem, which has resulted in weak investor enthusiasm for SGrBs.

Impact of Weak Investor Demand

Due to limited demand, India has struggled to raise sufficient funds through SGrBs, leading to funding cuts for key green projects.

The initial funding requirement for 2024-25 was ₹32,061 crore, but due to high borrowing costs, the government has revised the estimate to ₹25,298 crore. The biggest impact has been on grid-scale solar projects, whose allocation has been reduced from ₹10,000 crore to just ₹1,300 crore.

With SGrBs expected to raise ₹21,697 crore, the remaining ₹3,600 crore must be covered through general revenue, which contradicts the objective of using dedicated green finance mechanisms.

Way Forward for Strengthening India’s Green Bond Market

Exploring Sustainability Bonds

Emerging markets often issue sustainability bonds, which finance both green and social projects, instead of pure green bonds. A World Bank report highlights that this approach attracts a wider investor base and increases funding potential. India should consider issuing sustainability bonds to diversify its green finance instruments.

Enhancing Post-Issuance Transparency

Investor confidence depends on timely and detailed allocation and impact reports. However, India’s 2023-24 green bond allocation report is yet to be published, reducing transparency and trust. Strengthening post-issuance reporting will help attract investors looking for accountability in fund utilization.

Improving Liquidity and Market Participation

Increasing bond issue sizes, introducing partial early redemption options, and creating a dedicated green bond index could enhance secondary market trading. This would encourage mutual funds, pension funds, and foreign investors to participate in the green bond market.

Leveraging Multilateral Partnerships

India’s sovereign credit rating is relatively low, which affects investor confidence. Partnering with multilateral development banks such as the World Bank or Asian Development Bank could provide credit enhancement for India’s green bonds, making them more attractive to global investors.

Conclusion

India’s Sovereign Green Bonds are an important step toward financing a low-carbon economy, but weak investor demand, low greenium, limited liquidity, and lack of ESG-focused investments pose major challenges.

To make SGrBs more effective, India must diversify bond offerings, improve transparency, boost liquidity, and seek international partnerships. These steps will help attract investors, reduce reliance on general revenue, and ensure long-term financial sustainability for India’s green initiatives.

By strengthening its green bond market, India can secure stable funding for its clean energy transition and accelerate its progress toward a sustainable future.