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India’s Green Bonds Struggle To Attract Foreign Interest Despite Tax Incentives

India’s efforts to boost its green bond market face challenges, with foreign investors hesitant due to low liquidity and limited supply despite new tax advantages

India is intensifying its efforts to draw attention to its green debt market as foreign investments continue to flow predominantly into conventional sovereign bonds, leaving the green bond category lagging behind.

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According to a report by Bloomberg, the nation plans to enable trading of sovereign green debt from its newest financial hub in Gujarat, the home state of Prime Minister Narendra Modi, by March. However, market experts believe that these measures, including lower taxes, may not be sufficient to enhance the appeal of green bonds significantly. 

Kenneth Akintewe, head of Asian sovereign debt at Aberdeen plc, expressed scepticism about the impact of tax advantages on the green bond market. He noted that foreign investors might find better opportunities in supranational bonds, which are often sustainable or green, come with higher ratings, improved liquidity, and are free from domestic taxes. 

Despite India's push for green finance, green issuances have yet to gain popularity among foreign investors. Data from the Clearing Corporation of India indicates that green bonds are not among the 20 most favoured Indian government bonds held by foreign investors. Only about 14 percent of the planned issuance of $1.4 billion for the April-September period reached the market, as several auctions were scrapped due to the lack of a premium.

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This tepid response poses a challenge to the Indian government's strategy to lower financing costs and promote green growth in the country, which is the world’s third-largest emitter. Although India’s ESG debt issuance is on track to hit a record $15.6 billion this year, this volume remains a fraction of what is seen in countries like China and Japan, according to Bloomberg Intelligence. 

The contrast between the response to India’s green bonds and their conventional counterparts is stark. Global investors have eagerly snapped up Indian bonds at a pace not seen in seven years, driven by JPMorgan Chase & Co.'s inclusion of Indian bonds in a landmark index in June. However, only a small portion of the nearly $12 billion of such inflows has been directed towards green bonds. 

Xuan Sheng Ou Yong, the sustainable fixed-income lead for Asia Pacific at BNP Paribas Asset Management in Singapore, highlighted the importance of liquidity for foreign investors. "Whether they can actually have sufficient liquidity is perhaps the most important thing for a lot of foreign investors," he commented. He suggested that India could improve the appeal of green bonds by allowing investors to swap them with regular government debt, as Germany has done, and by issuing shorter-term green bonds, which tend to be more popular when interest rates decline. 

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Investor concerns about liquidity have been further evidenced by the fact that no green bonds have been traded since 16 August, according to data compiled by Bloomberg. This hesitancy underscores the challenges India faces in making its green bond market attractive to global investors despite the nation's commitment to fostering green growth. 

India’s green bond market must overcome significant hurdles if it is to compete with more established markets and play a meaningful role in the country’s environmental and economic strategies. 

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