What are RBI Green Bonds (2023)?
India is issuing its first Sovereign Green Bonds or RBI Green Bonds (SGrB) in 2023. So what are these RBI sovereign green bonds?
These Sovereign Green Bonds, popularly known as RBI India Climate Bonds, will be issued by RBI and the proceeds will be deployed in public sector projects for reducing the carbon intensity of the economy.
It is government’s attempt to mobilize resources for green infrastructure. meet climate related goals, facilitate better pricing (via green bond premium or greenium) by broadening and diversifying the investor base and contribute in the development of the green finance market as explained in this note (link) on RBI website. The concept of Green Bonds was announced by the finance minister in Union Budget for 2022-23.
RBI has announced the first ever sale of sovereign green bonds in FY2022-23 for a total amount of Rs 16,000 crore. The issuance will consist of 5-year Sovereign Green Bonds as well as 10-year Sovereign Green Bonds. The following schedule will be followed for RBI Green Bond issuance (source) –
- First Auction on 25 January 2023 – This will have two parts, namely 5-Year Green Bonds worth Rs 4000 Crore and 5-Year Green Bonds worth Rs 4000 Crore.
- Second Auction on 09 February 2023 – This will also have two parts, namely 5-Year Green Bonds worth Rs 4000 Crore and 5-Year Green Bonds worth Rs 4000 Crore.
So basically, there will be 2 bond issuance in each auction (details here):
- New GOI SGrB 2028 (Date of repayment Jan 27, 2028) – This is the so called 5-year RBI Green Bonds in India, and
- New GOI SGrB 2033 (Date of repayment Jan 27, 2033) – This is the so called 10-year RBI Green Bonds in India
The bonds will be issued through Uniform Price Auction (to make it attractive for institutional investors) and 5% of the notified amount of sale in each auction will be reserved for retail investors. Even NRIs can invest in RBI Green Bonds if they consider them worth investing. These bonds will be eligible for Repurchase Transactions (Repo) as well as eligible for Statutory Liquidity Ratio (SLR) purposes.
And what about tradability? RBI Green Bonds will be eligible for trading in the secondary market after the primary issuance is complete.
RBI Green Bonds will be based on Framework for Sovereign Green Bonds Government of India (download it here or read it on RBI website here). These green bonds would be structured similarly to traditional bonds with a commitment to use the proceeds for green investments only.
What is RBI Green Bonds Interest Rate?
Since these are bonds, they are bound to offer some returns. So what will be the Sovereign Green Bond Interest Rate in 2023?
The RBI hadn’t specified an interest rate for green bonds initially. But on 25-January-2023 auction, the following cutoff yields have been announced by RBI (via press release link):
- 5-Year Green Bond (for 2028) at 7.10%
- 10-Year Green Bond (for 2033) at 7.29%
As expected the interest on RBI Green Bonds is lower than similar government bond yields. At the time of auction, the yield on 10-year benchmark 7.26 percent 2032 bonds were at 7.3502% , and 7.38 percent 2027 bonds were at 7.1572%. So green bond yields are 5-6 bps lower.
One very important thing – as per the green bond framework, the payment of principal and interest on RBI sovereign green bonds will not depend on the performance of the eligible projects. So investors of green bonds will not bear any project-related execution risks. This is one major difference in how Sovereign Green Bonds will be different from government bonds.
The government anyways would primarily be targeting foreign investors with green mandates to subscribe to such green bonds. While this is the first green bond issuance in India, several emerging economies like Indonesia, Thailand, Malaysia, Philippines, Egypt, Lithuania, Mexico, Chile have issued sovereign green bonds in past. Bu green bond issuers outside Europe are generally rare. Here is an interesting analysis of how India is testing its green bond strategy in this opinion piece (link)
The projects eligible to be financed or re-financed by the proceeds of Green Bond issuances fall under the following nine categories: renewable energy, energy efficiency, clean transportation, climate change adaptation, sustainable water and waste management, pollution prevention and control, green buildings, sustainable management of living natural resources and land use, and terrestrial and aquatic biodiversity conservation.
Should You Invest in RBI Green Bonds (2023)?
As of now, 5% of the total amount of green bonds are made available for the retail investors. Since these bonds have soveriegn backing, they carry nil credit and nil default risks. Also, the bond investors do not bear project related risks, according to the framework released by the government. That is, the repayment of principal and interest payment are not conditional on performance or completion of the projects.
Retail investors can invest in green bonds through the RBI retail direct website or through the account maintained with their brokers, if it is made available.
There are no exclusive tax benefits provided for sovereign green bonds. The interest earned will be taxed at the tax slab rate. If the instrument is sold in the market before maturity, any captial gains will be taxed at 10%, if held for at least a year and if held for less than a year, then the short-term capital gains will be taxed at an applicable slab rate.
But in my view, small retail investors already have sufficent options available that give better returns and take care of all their investment needs. So they can skip green bonds (in it’s current avatar) without a second thought. Before investing in such bonds, investors should assess their investment goals, risk appetite, their existing portfolio, etc. to take a call. Certainly, it may take some more time for the green bond market to mature and to improve.
How to Buy Sovereign Green Bonds in India (2023)?
The RBI will sell two bonds maturing in five years and 10 years worth Rs 4000 crore each, at every auction.
The following schedule will be followed for RBI Green Bond issuance –
- First Auction on 25 January 2023 – This will have two parts, namely 5-Year Green Bonds worth Rs 4000 Crore and 5-Year Green Bonds worth Rs 4000 Crore. Results of the auction available here.
- Second Auction on 09 February 2023 – This will also have two parts, namely 5-Year Green Bonds worth Rs 4000 Crore and 5-Year Green Bonds worth Rs 4000 Crore.
Since this will be the first time that India will be launching such RBI Green Bonds or RBI sovereign green bonds, these two auctions in 2023 would give quite clear indication of the appetite for such environmentally sustainable bond issuances by the Indian government in 2023 and beyond. Both from within India and from foreign institutional investors. Such bonds have been fairly successful in developed countries earlier and can be a good avenue for the Indian government to tap into new pools of capital.