Sovereign Bonds and Green Debt: India's Tax Incentives and Foreign Inflows

Sovereign Bonds Becoming an Attraction

India is ramping up initiatives to capture interest in its green debt as the category fails to attract substantial foreign inflows seen in local sovereign bonds.

Government Measures and Tax Incentives

The nation plans to facilitate the trading of sovereign green debt from Gujarat by March. However, lower taxes alone may not significantly enhance demand due to a limited supply and minimal issuances.

Investor Sentiments

“The tax advantage isn’t likely to be a *game changer* unless market liquidity improves,” noted Kenneth Akintewe, head of Asian sovereign debt at abrdn plc. Foreign investors currently have access to various supranational bonds that offer higher ratings, liquidity, and domestic tax exemptions.

Market Performance

Green issuances currently rank outside the top 20 of Indian government bonds favored by foreign investors. Only about 14% of the planned $1.4 billion issuance for the April-September duration entered the market.

Global Context

In stark contrast to green bonds, conventional bonds saw a surge with foreign funds purchasing at unprecedented rates post a legacy index inclusion by JPMorgan Chase & Co. in June. However, a paltry share of about $12 billion saw investment in green bonds.

Liquidity Challenges

“Sufficient liquidity is crucial for many foreign investors,” observed Xuan Sheng Ou Yong, sustainable fixed income lead for Asia Pacific at BNP Paribas Asset Management. He proposed that allowing the swapping of green bonds with regular bonds and creating a yield curve through shorter maturities could ameliorate current issues.

Investor Concerns

Weak demand persists as fear of liquidity deters buyers. According to Bloomberg data, no green bonds exchanged hands since August 16. Giulia Pellegrini, Allianz Global Investors, remarked on the sustained wait for new primary issuances due to the illiquidity of the secondary market.

Market Outlook and Future Prospects

While India's intentions to address environmental issues are commendable, the liquidity crisis hampers green debt performance. It's essential for the country to ensure regular issuance and enhance market depth to attract global investors.