Tax breaks are India’s draw, as green debt fails to match bond frenzy

The country will allow trading of sovereign green debt from its new financial centre in Prime Minister Narendra Modi’s home state of Gujarat in March. But the tax cut may not be enough to boost its appeal amid a lack of supply and small issuances.

“The tax benefit won’t necessarily be a game-changer unless market liquidity improves,” said Kenneth Akintewe, head of Asian sovereign debt at abrdn plc. Foreign investors “They can access supranational bonds, many of which are also sustainable or green, with higher ratings and improved liquidity and free of internal taxes.”

According to data from the Clearing Corporation of India, green issues are not among the top 20 most popular Indian government bonds among foreign investors. Only about 14% of the planned $1.4 billion issuance for the April-September period has reached the market, as officials ruled out auctions that did not generate a premium.

This hampers the government’s plan to cut financing costs to promote green growth in the world’s third-largest issuer. At $15.6 billion, India’s ESG debt issuance is set to hit an annual record, but the volume remains a fraction of that of peers such as China and Japan, according to Bloomberg Intelligence.

The tepid response to India’s green bonds contrasts with the enthusiasm seen for its conventional peers. Global funds pounced on Indian bonds at a pace not seen in seven years following JPMorgan Chase & Co.’s historic inclusion in the index in June. Only a small portion of about $12 billion of those inflows has gone into green bonds.

“For many foreign investors, the most important thing is whether they can actually have enough liquidity,” said Xuan Sheng Ou Yong, head of sustainable fixed income for Asia Pacific at BNP Paribas Asset Management in Singapore.

He suggested allowing investors to swap green bonds for regular government debt as has been done in Germany, and building a yield curve by issuing shorter green bonds, as they are more popular when interest rates fall.

Weak demand

Concerns about how to find a buyer when they want to reduce their holdings are keeping investors at bay: No green bonds have exchanged hands since Aug. 16, according to data compiled by Bloomberg.

Giulia Pellegrini, portfolio manager at Allianz Global Investors GmbH, which started trading rupee sovereign bonds this year, is waiting for the next primary issue as the secondary market remains illiquid.

India has all the ingredients from a macroeconomic point of view: “It is a giant that seems committed to doing more on environmental issues and climate change,” he said. “But at the moment we are literally missing the paper.”

While tight liquidity remains a topic of discussion in the global green bond space, small sizes and unpredictability of issuance are compounding challenges for India. Only one of its green bonds crossed the issuance threshold for inclusion in JPMorgan’s index. The country’s decision last month to remove future issuance of 14- and 30-year debt from index-eligible securities will also limit the availability of green debt to investors.

“The small size of a long-term bond that foreign investors typically buy results in lower liquidity in secondary markets and higher bid-ask spreads,” said Gustavo Medeiros, head of research at Ashmore Group Plc. “This makes it an expensive instrument to hold. From that perspective, it is not surprising that demand is weak.”