Why has India allowed FIIs to invest in its green bonds?

What are Sovereign Green Bonds? How will investments by Foreign Institutional Investors in green government securities accelerate India’s transition to a green economy?

The story so far: n April 5 the Reserve Bank of India (RBI) green lighted investments in the country’s Sovereign Green Bonds (SGrBs) by Foreign Institutional Investors (FIIS) — investors such as insurance companies, pension funds and nation-states’ sovereign wealth funds. SGrBs are a kind of government debt that speci cally funds projects attempting to accelerate India’s transition to a low carbon economy.

OHow does it help in green transition?

Allowing FIIs to invest in India’s green projects widens the pool of capital available to fund the country’s ambitious 2070 net zero goals, ensuring 50% of India’s energy comes from non-fossil fuel based sources and to reduce the carbon intensity of the nation’s economy by 45%, as pledged by Prime Minister Narendra

Modi at COP26 in Glasgow 2021.

The RBI had issued SGrBs worth ¦16,000 crore in two tranches in January and February last year with maturities in 2028 and 2033. While in both instances the bonds were oversubscribed, the main participants were domestic nancial institutions and banks, narrowing the avenues from where the government could borrow. Moreover, these green Government-Securities (G-Secs) were classi ed under the Statutory Liquidity Ratio (SLR), a liquidity rate xed by the RBI that nancial institutions must maintain with themselves before they lend to their customers.

SGrBs yield lower interest than conventional G-Secs, and the amount foregone by a bank by investing in them is called a greenium. But central banks and governments the world over are encouraging nancial institutions to embrace greeniums to hasten the transition to a greener future. Climate nance experts believe India would gain from allowing FIIs in green G-Secs. They say FIIs are also looking to diversify their pool of green investments, as there is considerable regulatory support particularly in developed countries. And so this is an opportunity for them to invest in India’s green g-secs. Ashim Roy, Energy Finance lead at World Resources Institute, India said FIIs might also be looking to gain green credentials when such investments may not be available in their home markets, and because India has successfully addressed greenwashing fears with the Sovereign Green Bonds Framework in late 2022.

What is the green taxonomy gap?

In the 2022-23 Union Budget, Finance Minister Nirmala Sitharaman announced the government’s decision to issue SGrBs to accelerate funding government projects such as harnessing o¨shore wind, grid-scale solar power production, or encouraging the transition to battery operated Electric Vehicles (EVs). But the