When Green Bond Ambitions Run Up Against a Wall of Volatility

The RBI’s decision on June 13, 2025 to cancel its 30-year sovereign green bond auction despite receiving bids worth ₹109.4bn—more than double the ₹50bn on offer—reflected that the yields market participants demanded exceeded the RBI’s expectations.

The auction of the 6.98% Government of India’s Sovereign Green Bond (SGrB) 2054 received 90 competitive bids. Notably, the RBI also cancelled a 10-year green bond auction in May 2024—the first cancellation for that maturity.

The cancellation occurred despite sovereign green bonds dominating India's sustainable finance landscape. The Indian government has raised ₹440bn in green bonds since January 2024—more than all other issuer categories combined, including financial institutions (₹85bn), corporates (₹235bn) and municipal corporations (₹4.3bn) through May 2025.

This activity across diverse issuer categories demonstrates broad-based appetite for sustainable finance, spanning central government, financial institutions, local government and corporate issuers. This indicates that appetite for climate-focused investments remains strong across multiple issuer types. However, the second sovereign green bond auction cancellation within a year, following the May 2024 10-year bond cancellation, signals underlying pricing tensions in the dominant segment that warrant closer examination.

Beyond the Vanishing ‘Greenium’

The pattern of cancellations reveals more than just the RBI’s borrowing cost discipline, it indicates a fundamental mismatch between the central bank’s expectations and market demand. When the May 2024 auction failed with bids just one to seven basis points (bps) above the 6.99% benchmark, it wasn’t merely fiscal prudence at work. The RBI expected investors to pay a “greenium” i.e. accepting lower yields for the green label, rather than demand extra compensation.

This expectation increasingly conflicts with how green bonds are priced, reflecting a significant erosion in green premiums over time. Historically, Indian SGrBs have offered a low greenium of 2–3bps. As a result, green bonds worth ₹74.4bn remained unsold after two RBI auctions in November and January 2024 and were devolved to primary dealers as investors sought higher yields.

Global trends reinforce this decline. Japan’s green bonds show greeniums were substantial in earlier years, offering 7–17bps lower yields for companies with strong environmental performance. However, markets have become more sophisticated in distinguishing between “good” and “bad” greeniums, with growing scepticism about artificial premiums driven by supply-demand imbalances rather than fundamental issuer quality.

Bloomberg Intelligence data from the first quarter (1Q) of 2025 reveals that while sustainable bonds globally outperformed conventional investment-grade corporates in spread terms, the picture varies significantly by region and sector. Financial institutions still command green premiums of 1.8bps, but heavy emitters in materials and industrials now trade at discounts due to transition risk concerns.

More tellingly for India, the regional breakdown shows stark differences. While the Americas maintained green premiums of 1.7bps in 1Q 2025, and Asia-Pacific nearly eliminated its discount to 0.6bps from 3.2bps in 4Q 2024, Europe, the Middle East and Africa (EMEA) bonds still traded 2.4bps wider than conventional bonds. India’s sovereign green bonds appear to fall within this EMEA-style dynamic, where investors demand higher yields rather than pay sustainability premiums.

The fundamental issue is that when geopolitical tensions push yields up by 20–50bps, or macroeconomic risks add a further 10–20bps of risk premium, even the historically substantial greeniums of 7–17bps would prove insufficient buffers, let alone today’s 1–5bps.

Markets don’t efficiently price long-term climate risks, so any greenium reflects regulatory mandates and institutional sustainability requirements rather than fundamental risk assessment. When this already diminished buffer disappears entirely, green bonds lose even marginal advantages during difficult market conditions.

Crude and Currency Jolt

Unfortunately, the recent bond auction coincided with escalating West Asia tensions that pushed crude oil prices higher, creating concerns for India given its dependence on imported crude. On the day of the auction, yields on government securities rose by 4–5bps as sentiment weakened due to the uptick in Brent crude prices.

Currency pressure compounded these challenges. The Indian rupee has weakened substantially against the US dollar, forcing investors to demand higher yields to compensate for the currency risk.

For 30-year securities, yields increased 18.6bps to 7.018% in recent weeks. Over the previous year, short-term two-year sovereign bond yields fell dramatically by 114.2bps, but 30-year yields declined only 8.5bps. When recent market stress hit, the 18.6bps increase erased more than half of that modest yearly decline, pushing yields back above 7%. Even the liquid 10-year benchmark closed at 6.36%, up 2bps, showing the entire government bond yield curve faced some selling pressure.

The critical point is that macro stress affects all government securities equally. The RBI would likely have cancelled any bond auction during this period if yields exceeded acceptable thresholds. Green bonds simply had the misfortune of being scheduled during macroeconomic and geopolitical volatility and lacked a sufficient buffer against marginally difficult conditions.

Balancing Long and Short

The RBI’s pricing discipline becomes critical when viewed against India’s massive borrowing programme. According to the Ministry of Finance, gross market borrowing for financial year 2026 is budgeted at ₹148.2trn, with 30-year securities accounting for 10.5%. Every basis point concession on 30-year paper costs billions yearly across the full issuance programme.

With 26 weekly auctions planned just for the first half of the fiscal year, accepting yields above target levels would establish expensive benchmarks cascading across the entire borrowing calendar.

This highlights the inherent tension between India’s ambitious infrastructure agenda and immediate pricing demands of bond markets. While government infrastructure spending of ₹11.2trn and the net-zero pledge for 2070 create compelling long-term investment themes, bond investors operate on different time horizons and risk assessments.

Patience Over Pressure

The RBI’s approach reflects strategic patience that is essential for maintaining India’s sovereign credibility. Rather than chasing market prices during stress periods, the central bank preserves its benchmark status across all instruments for when conditions improve.

India’s structurally minimal 2–3bps greenium offers little protection against macro stress that moves yields by much larger margins. As India scales green financing to meet its 2070 net-zero target, policymakers face a choice: accept that green bonds will trade at discounts during stress periods, develop deeper domestic institutional demand or focus efforts through development finance institutions that can absorb duration risk more effectively than market-driven auctions.

The writer is a sustainable finance specialist at Institute for Energy Economics and Financial Analysis