RBI widens door for foreign participation in green bonds: What this means

A scheme for investment and trading in sovereign green bonds (SGrBs) by eligible foreign investors in IFSC is being notified separately in consultation with the government and the IFSC authority

The Reserve Bank of India (RBI) on Friday announced a move that's set to accelerate India's green initiatives. Foreign investors operating within the International Financial Services Centre (IFSC) can now invest in Sovereign Green Bonds (SGrBs). This decision unlocks a new avenue for financing eco-friendly projects in the country.

Based on an announcement in the Union Budget for 2022-23, the government issued Sovereign Green Bonds (SGrBs) in January 2023. Subsequently, SGrBs were issued as part of the government borrowing calendar in 2023-24.

"India raised two tranches of sovereign green bonds amounting to Rs 16000 crore across two maturities in 2023. The bonds were domestically issued and were eligible for investment by foreign portfolio investors (FPIs) registered with market regulator Sebi. With a view to widen the investor base, the Reserve Bank of India has decided to permit eligible foreign investors in the International Financial Services Centre (IFSC) to also invest in such bonds," explained Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India. 

Business Standard decodes what this key initiative means: 

What are Sovereign Green Bonds (SGrBs)?

Imagine a government bond, but instead of funding general expenses, the money raised goes specifically towards eco-friendly projects. These projects could involve renewable energy sources like solar or wind power, sustainable infrastructure development, or clean transportation initiatives. By investing in SGrBs, you're essentially lending money to the government for these green causes.

"Bonds represent fixed-income instruments the corporate sector or government issued to fund projects, clear debts, or expand business, offering a specified interest rate returned by the issuer at maturity. In contrast, green bonds are financial instruments that support environmentally sustainable projects, typically offering lower capital costs than regular bonds. The International Capital Market Association (ICMA) defines a green bond as explicitly used to finance or refinance eligible green projects, resulting in environmental benefits," said the Indian School of Public Policy in a research note.

Let's say the  government wants to build a large solar power plant. This project would be expensive, but crucial for reducing India's dependence on fossil fuels. By issuing SGrBs, the government can raise money from foreign investors in the IFSC. These investors get a return on their investment (interest payments), while India gets the funds needed for the solar plant, contributing to a cleaner future.

Think of the IFSC as a special economic zone for financial services, located in Gujarat. It has its own regulations and allows foreign companies and investors to participate more easily in the Indian financial market.

Why is this a big deal?

Previously, only Indian investors could buy SGrBs. Now, with foreign investors in the IFSC on board, the pool of potential investors significantly expands. This translates to potentially more funds available for India's green projects.

The government had set a target of raising ₹20,000 crore via the issuance of SGrBs in FY24, and it plans to borrow ₹12,000 crore through the sale of the bonds in the first six months of FY25.

As part of the Budget estimate, the government is planning for gross market borrowing of Rs 14.13 trillion for 2024-25. Out of this, Rs 7.5 trillion, or 53 per cent, is scheduled to be borrowed in the first half.

At present, GIFT IFSC is the maiden international financial services centre in India.

Increased investments in sovereign green bonds (SGrBs) will benefit the government in several ways:

Deeper Climate Bonds Market: By allowing foreign investors (FPIs) to participate through the IFSC, the government aims to expand the pool of investors interested in these green bonds. 

Funding for Green Projects: The money raised through SGrBs provides much-needed capital for the government to invest in public sector projects that aim to reduce the carbon footprint of the Indian economy. Examples include renewable energy infrastructure, sustainable transportation systems, and energy-efficient buildings.

Meeting Sustainability Goals:  The funds from SGrBs can be used for initiatives that contribute to India's Sustainable Development Goals (SDGs), a set of international targets aimed at achieving a more sustainable future.