By Dharamraj Dhutia
MUMBAI – The Indian central bank devolved 70% of a new 10-year green bond at an auction on Friday on the primary dealers who underwrote the issue, as market participants likely demanded yields higher than the Reserve Bank of India’s comfort, traders said.
Devolvement of bonds on the primary dealers – bond houses that generally buy government securities at primary auctions and sell it to their clients – happens when there is not enough demand for a particular bond.
The RBI sold around 15 billion rupees ($177.53 million) worth of 10-year green bonds to investors at a 6.79% coupon but devolved nearly 35 billion rupees worth of the note, the first such devolvement since February 2023.
The 10-year benchmark bond yield was slightly higher at 6.80% as of 3:30 p.m. IST.
Devolving green bonds will make future sales of such notes unattractive and tough, dealers said.
“The RBI should have canceled the auction, as there is no point in punishing primary dealers,” a senior trader with a primary dealership said, requesting anonymity as he is not authorised to speak to media.
Bidding was in the range of 6.78%-6.84%, above the prevailing 10-year bond yield, he added. The central bank does not disclose bids received.
“Market appetite for green bonds has started to wane as they have been expecting such subscriptions to be incentivised,” said Alok Singh, group head of treasury at CSB Bank. “But due to lack of any announcement, investors have no incentive to hold these bonds.”
The RBI sold less than 30% of the planned quantum of green bond sales in a similar auction in August. The central bank had also completely withdrawn its green bond sale in May after witnessing tepid bidding interest.
The central bank wanted some sort of “greenium” to sell these bonds, and “they are not comfortable with yields rising above the prevailing paper,” said VRC Reddy, treasury head at Karur Vysya Bank.
A greenium is a term used for the lower yields that investors are willing to accept for these securities, which are intended to finance environmentally sustainable projects.
In fiscal 2023, government raised 160 billion rupees through the green bonds, sold at around 5-6 bps below government bond yields. The government raised 200 billion rupees in fiscal 2024 at 1-2 bps below the prevailing yields.
($1 = 84.4950 Indian rupees)
(Reporting by Dharamraj Lalit Dhutia; Editing by Janane Venkatraman)
