MUMBAI: Indian lenders expect North Block to seek a lower premium while selling green bonds in a higher-for-longer yield environment this fiscal year and are concerned the relative currency-market stability, a fallout of calibrated central bank interventions, might cause a spurt in unhedged risks that could later roil exchange rates.
Recent meetings between senior officials of the Reserve Bank of India (RBI) and bank treasury executives have focused on market appetite for upcoming green bond sales even as the likelihood of liquidity-draining open-market auctions remain a concern for an anxious bond market.
“There were talks on the green bond auction and the possible premium or ‘greenium’ that could be expected in this year’s round of auctions, given that market sentiment is weak amid global headwinds,” a banking source told ET. “The government would expect a premium that is at least in line with that seen last year.”
Central bank officials that participated in the discussions heard the feedback without providing Mint Road’s views, sources aware of the developments said. The RBI didn’t respond to ET’s mailed request for comment.
The Centre plans to sell green bonds worth `20,000 crore in FY24, 25% higher than its maiden green bond sales last fiscal. Given that the funds raised through green bonds are used for environmentally sustainable projects, globally such securities are typically issued at a premium to other bonds as investors are comfortable with a lower yield.
While the green bonds issued last year did see a 5-7 basis point premium, the extent of the decline in yields vis-à-vis those on regular government securities of comparable maturity was not large as India does not yet have an established green-bond market, traders said.
One basis point is a hundredth of a percentage point.
Banks are also concerned about unhedged currency risks in an environment where the rupee, but for evident central bank interventions, would have mimicked the broader weakness in emerging-market currencies against the dollar.
“On the forex front, the broad feedback was on the tight range that the rupee has traded in versus the US dollar over the last couple of weeks and the possibility that some companies could be opting not to actively hedge currency risk despite the global financial market volatility,” said one of the treasury sources cited above.
Over the past few months, the rupee has remained largely stable versus the US dollar, faring better than many other Asian units, even as the greenback has strengthened globally following a surge in American bond yields.
Since August 31, the rupee has weakened a mere 0.6% versus the US dollar, faring better than 7 Asian currencies on a spot return basis, Bloomberg data showed. Over the same period, the US dollar index has strengthened more than 2%.
As on October 27, the RBI’s foreign exchange reserves were at $586.11 billion versus $594.86 billion as on August 25. The decline in the reserves is not only attributable to dollar sales by the RBI but also revaluation in the face of a stronger greenback.
Separately, yields have remained a concern for India’s bond markets despite softening inflation. Following the RBI’s decision last month to signal open market sales of government bonds, bank treasury officials also communicated a lack of visibility on liquidity conditions heading into the last quarter of the financial year.
“Banks said that liquidity will tighten towards the end of the calendar year and early into next year as elections will lead to an increase in currency leakage,” another banking executive said.
Source: The Economic Times