India’s push to fund green investments through Sovereign Green Bonds (SGrBs) is facing muted investor demand, limiting the Union government’s ability to secure a meaningful green premium—lower yields compared to regular bonds—from the debt market.

Over the past two and a half years, market participants have not settled for lower yields, limiting the proceeds from green bonds, Ajay Seth, Secretary, Department of Economic Affairs, told The Indian Express.

When the Reserve Bank of India (RBI) auctioned two new SGrBs worth Rs 10,000 crore in November and January, bonds valued at Rs 7,443 crore remained unsold and were devolved to primary dealers as investors sought higher yields. This came despite a rule change allowing NRIs and foreign portfolio investors to participate without restrictions.

Sovereign green bonds are issued by the Union government to fund green investments, mainly for producing electric locomotives and implementing metro projects. Without a ‘green premium’, these bonds offer no financial advantage over regular bonds, making them less attractive to issuers. The government has yet to secure any significant green premium on SGrB issues.

“At times it is 2-3 basis points, at times it is nothing. But we do not want to judge that issue. Some people have not come forward, maybe tomorrow they come forward, maybe foreign investors come forward,” Seth said.

In August 2024, RBI accepted only Rs 1,697 crore in bids for a Rs 6,000 crore SGrB auction, and in May, it withdrew another Rs 6,000 crore auction altogether. Small issue sizes, along with investors holding on to SGrBs until maturity, have further dampened secondary market trading and made the security increasingly illiquid.

“There was a double whammy, small issuance and that issuance also disappearing into held-to-maturity (HTM) books. There is no secondary market for these bonds. It has become like loans,” said Vikas Goel, industry veteran and former CEO of PNB Gilts Ltd.