India’s Green Bond Story: Why the Budget Matters More Than Ever

India’s sovereign green bond programme has reached a decisive stage. After two years of institution-building and experimentation, recent auction outcomes suggest that the market is now testing the limits of pricing and demand. This is not a setback, but it does underline a critical point: green finance in India can no longer rely only on frameworks and intent. It now needs calibrated policy support to move from symbolism to scale.

Sovereign green bonds were introduced to finance climate-friendly public expenditure—renewable energy, clean transport, sustainable urban infrastructure—while also helping create a domestic green bond market. The framework is credible and internationally aligned. Yet, recent borrowing outcomes indicate that green bonds have not yet become a distinct or consistently cheaper source of funding for the sovereign.

What Has Happened So Far
Fisal 2023–24 was a relatively smooth year for India’s sovereign green bond programme. The entire ₹200 billion issuance was completed without any devolvement on primary dealers and without bid rejections, suggesting adequate demand at prevailing yields.

Fiscal 2024–25 marked a clear shift. Against a notified amount of ₹320 billion, only ₹142.54 billion was accepted. A further ₹74.43 billion devolved on primary dealers, while ₹103.03 billion of bids were rejected outright. This was an early signal that investors were no longer willing to absorb green bonds at yields that were not clearly differentiated from conventional government securities.

In 2025–26, the government projected sovereign green bond issuance of ₹200 billion. Of this, ₹150 billion was successfully raised through three tranches of ₹50 billion each, all in the 30-year maturity. The remaining ₹50 billion tranche was rejected, as bids were received at yields higher than what the Reserve Bank of India considered acceptable.

Taken together, these outcomes show that the sovereign green bond framework is firmly in place, but acceptance is increasingly contingent on pricing. The market is clearly signalling that green bonds, by themselves, are not yet commanding a durable premium.

Why Green Bonds Are Not Cheaper Yet
In many developed markets, green bonds often enjoy a small but persistent pricing advantage over conventional bonds, commonly referred to as a “greenium.” In India, this premium has been inconsistent and fragile.

The reason is structural rather than ideological. The bulk of government securities in India are held by banks, insurance companies and provident funds, whose investment decisions are driven primarily by regulatory requirements and asset–liability considerations. For these investors, a sovereign green bond and a regular government bond carry identical credit risk. In the absence of regulatory or balance sheet incentives, there is little reason to accept lower yields purely for the green label. 

Foreign ESG-oriented investors do participate, but selectively and with clear yield thresholds. India also lacks a sufficiently large domestic investor base with mandated or guided allocations to green assets. Without sticky, policy-anchored demand, greenium cannot be expected to emerge organically. 

Why 30-Year Green Bonds Dominate Issuance
The government’s preference for issuing green bonds at the 30-year maturity is deliberate. Most green infrastructure projects—renewable energy plants, metro systems, climate-resilient urban assets—have long economic lives. Long-dated bonds provide better alignment between asset duration and debt repayment.

There is also a market-stability rationale. The 10-year government bond is the key benchmark for interest rates and monetary policy transmission. Concentrating green issuance at the long end avoids distorting this benchmark while gradually building a long-tenor green yield curve in coordination with the central bank.

Beyond Sovereigns: A Broader Green Finance Architecture
India’s green finance ecosystem is evolving beyond sovereign bonds. Enhanced ESG disclosures under the Business Responsibility and Sustainability Reporting framework have improved data quality and transparency for investors. Regulatory clarity on ESG-labelled debt instruments is also helping standardise sustainable finance products.

Municipal Green Bonds: The Next Growth Engine
One of the most promising developments has been the government’s push to encourage municipal green bonds, supported by interest-rate subsidies. This directly addresses the cost of borrowing for urban local bodies.

With subsidies, municipalities can issue green bonds at significantly lower effective costs, making them financially attractive rather than just environmentally desirable. This enables funding for water supply, sewage treatment, waste management, electric mobility and climate-resilient urban infrastructure. If scaled properly, municipal green bonds can materially expand India’s green asset base and complement sovereign issuance.

What the Budget Must Do Next – From Intent to Impact
The forthcoming Union Budget is critical for determining whether India’s green bond programme remains episodic or becomes structural.

First, it must be acknowledged that a sovereign green bond framework already exists. The issue is no longer design, but demand. Acceptance and rejection are increasingly driven by greenium expectations. The Budget should therefore focus on demand-side levers rather than new frameworks. 

Second, long-term institutional investors—provident funds, pension funds and insurance companies—must be brought into the market through regulatory push, not just persuasion. Even a small, fractional allocation requirement to sovereign and approved public-sector green bonds would materially deepen demand without compromising prudence.

Third, banks’ Statutory Liquidity Ratio holdings offer a powerful but underused lever. Creating even a fractional green SLR sub-bucket over time would generate structural demand, improve secondary-market liquidity and materially support greenium formation.

Fourth, retail green finance must be integrated into the strategy. Banks have already introduced Green Fixed Deposits, but doubt any bank is actively pushing this. The Budget can accelerate this trend by offering targeted incentives to primary retail investors such as limited capital gains relief or income-tax concessions up to a defined threshold for investments in government approved green bonds, including sovereign, municipal and select public-sector issuances.

Such measures would broaden the investor base, reduce reliance on a narrow institutional pool, and allow households to participate directly in India’s green transition.

The Road Ahead
India’s sovereign green bond programme has succeeded in establishing credibility and transparency. The challenge now is to convert this foundation into depth and durability.

The outcomes of 2024-25 and 2025-26 should be seen as a phase of price discovery, not policy failure. With calibrated regulatory nudges, demand-side incentives and clear Budget signalling, green bonds can evolve into a meaningful financing instrument—capable of funding climate priorities while eventually delivering pricing benefits.

India has laid the groundwork. The next phase requires consistency, confidence and the willingness to use policy tools to help the market mature.