RBI Devolves 70% New Green Bonds At 6.78%-6.84%, Cutoff Below 10-Year Note

The Reserve Bank of India (RBI) recently sold 15 billion rupees ($177.53 million) worth of 10-year green bonds, offering a coupon of 6.79%. However, the central bank was forced to devolve nearly 35 billion rupees worth of bonds, marking the first such devolvement since February 2023. Devolvement occurs when primary dealers—who typically buy government securities at auction—are unable to sell enough of the bonds to investors, signaling insufficient market demand.

Traders believe the primary reason for the devolvement was that market participants demanded higher yields than the RBI was comfortable with. The 10-year benchmark bond yield stood at 6.80% by 3:30 p.m. IST, slightly above the coupon rate on the green bonds. The devolvement raises concerns that future sales of these bonds could become more challenging, making it harder for the RBI to attract investors.

Market Demand for Green Bonds Slows Down

The reluctance of investors to buy green bonds at the offered yields has been attributed to a lack of incentives. “Investors expected these bonds to be incentivized, but with no such announcements, there is little reason to hold onto them,” said Alok Singh, group head of treasury at CSB Bank. Additionally, primary dealers indicated that the bidding range for the bonds—6.78%-6.84%—was higher than the prevailing 10-year bond yield, signaling a mismatch in expectations.

The Concept of ‘Greenium’ and Market Sentiment

The RBI had hoped for a “greenium”—a term used for lower yields on green bonds due to their environmentally sustainable nature. However, with yields rising above the market’s comfort zone, the demand for these green bonds has started to wane. VRC Reddy, treasury head at Karur Vysya Bank, noted that the RBI’s discomfort with yields rising above prevailing government bond rates may have contributed to the lack of demand.

Challenges for Green Bond Issuance Moving Forward

This auction follows similar challenges in previous months. In August, the RBI sold less than 30% of its targeted green bond volume, and it canceled a green bond sale in May due to weak bidding interest. In fiscal 2023, the Indian government raised 160 billion rupees through green bonds, which were sold at yields about 5-6 basis points below regular government bonds. In fiscal 2024, the figure rose to 200 billion rupees, but the yield spread narrowed to just 1-2 basis points.

The latest devolvement highlights ongoing challenges in the green bond market, and experts are questioning whether the RBI can successfully attract investors for future issues, especially without offering a significant “greenium” or other incentives to make these bonds more attractive.

What’s Next for India’s Green Bond Market?

With devolvement becoming a concern and investor demand softening, the RBI may need to rethink its approach to green bond issuance. A shift in strategy, including more compelling incentives or adjustments in yield offerings, could be necessary to revive interest in this market. For now, market participants will be closely watching how the central bank navigates these challenges and whether it can sustain the momentum for financing environmentally sustainable projects.