Synopsis

Insurers in India are showing significant interest in sovereign green bonds, aiding in the establishment of a substantial greenium. With market confidence in the ability to absorb a larger supply, there’s a push for enhanced issuance of these bonds. Insurers need them for optimal asset allocation and regulatory advantages, emphasizing the importance of sustaining this demand in India’s financial landscape.

A persistent premium over comparable government debt, alongside strong and steady demand from insurance companies has convinced market participants a larger supply of Indian sovereign green bonds can be absorbed in the second half of the fiscal year.

New Delhi sold 50 billion rupees ($524 million) of 30-year sovereign green bonds, at a so-called greenium of four basis points on Friday, ‌leading to an ⁠average ⁠premium of four bps in the fiscal half-year, the highest since such sales began in the second half of fiscal 2023.

A greenium is the lower yield investors are willing to accept for bonds that finance environmentally sustainable projects.

"Green bonds are eligible for classification under the infrastructure category, which provides an added benefit for insurance companies from an asset allocation and regulatory perspective," said ​Shobit Gupta, chief investment officer, Generali Central Life Insurance.

"The ⁠existing demand-supply ‌dynamics have resulted in a noticeable greenium, with green bonds trading ​richer than comparable ​conventional government securities," he said.

Including the latest issuance, India now ⁠has sovereign green bonds worth 877 billion rupees or $9.2 billion ​outstanding. Notes with 30-year maturities are the most issued, crossing the 500 ​billion rupee mark.

Strong demand has led to calls by market participants for some increase in the supply of such papers, as insurers manage a growing corpus and find a lack of sufficient substitutes.

"We believe the market is well positioned to absorb a higher supply of green bonds in the second half of FY27, ‌particularly if the issuance is concentrated in the longer part of the curve," said Sachin Bajaj, chief investment officer at Axis Max Life Insurance.

"Demand ​for these bonds ​continues to be ⁠supported by insurers' ALM requirements."

After starting with five-year and 10-year green bonds in January 2023, New Delhi had to cancel or cut the size of a few issuances, before ultimately ​selling these papers at yields above those ofcomparable government bonds.

However, the greenium returned with the government sticking to issuing 30-year green bonds in the last 18 months.

"Long green bond issuance has remained consistent over the past three fiscal years, adequately matching current investor demand," Rahul Bhuskute, CIO at Bharti AXA Life Insurance said.

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