Whalesbook
Government Considers Tax Incentives for Green Bonds
The Indian government is exploring tax rebates as a potential incentive for investors in sovereign green bonds, signaling a push to revive flagging interest in the climate finance instrument. Officials familiar with deliberations suggest these measures could be introduced in the upcoming Union budget for fiscal year 2027.
Subdued Demand and Yield Gap
Investor appetite for India's sovereign green bonds has waned over the past two years. The current fiscal year has seen subscriptions fall significantly below targets, with only approximately ₹16,697.39 crore raised against a ₹25,342 crore earmark by January 2025. This tepid demand is partly attributed to a minimal and inconsistent 'greenium' – the yield difference between green bonds and conventional ones – which in India has been limited to 2-3 basis points, falling short of the 3-8 basis points seen in developed markets. Madan Sabnavis, Chief Economist at Bank of Baroda, noted that a typical greenium of 10-15 basis points lower yield is often expected to attract buyers, but this has not materialized consistently.
Strategic Importance for Green Transition
Rishi Shah, Partner at Grant Thornton Bharat, emphasized that sovereign green bonds are crucial for directing long-term capital towards investments that mitigate structural economic vulnerabilities, such as energy dependence and climate risks. He stated that a credible green bond curve can serve as a benchmark for private issuance, ultimately lowering funding costs and encouraging private capital for India's energy transition. The nation requires an estimated $1.5 trillion for its energy transition roadmap to combat climate change and meet its renewable capacity targets.