The government has been accumulating funds through green bonds since 2022-23 and has raised a total of Rs 36,000 crore in the last two years.

The RBI Governor said the trading of sovereign green bonds could get under way at the international Financial Services Center in Gujarat during the second half of the current fiscal year 2025.

  Green Bonds

The green bond is one kind of fixed income source that is designed to fund projects that have a positive impact on the environment or climate benefits. We have seen that the government take initiatives and introduce projects that can include Clean Transportation, Sustainable Agriculture and water management projects, and among others.

Why Green Bonds are Issued

• Environmental Protection :-  The government emphasis on reducing carbon emissions, improving energy efficiency and preserving natural resources. There are multiple environmental agreements signed to protect the environment.

Here is the list.

Basel Convention	1989
Rio Summit	1992
Cartagena Protocol on Biosafety	2000
United Nations Framework Convention on Climate Change (UNFCCC)	1992
UNCCD	1994
UN-REDD	2008
Nagoya Protocol	2010

• Corporate Social Responsibility:- Green bonds can be issued by corporations, governments, and other financial institutions, to raise the capital for initiatives that contribute to sustainability and climate benefits. For-example:- Projects include renewable energy, pollution prevention and control, Clean Public Transportation.

• Investor Demand :-  Climate change is a global concern, governments are taking initiatives and spreading climate awareness among the people. With growing awareness, many investors seek to align their portfolios by investing in such projects to attain sustainability goals.

What is Bond?

Bond is a type of government security or fixed-income investment. When you buy a government a security or bond, that means you’re lending your money to a government for a specific period of time. In return, the government pays you interest.

What is the point of selling Indian bonds on the market?

The RBI takes ultimate measures to manage liquidity as foreign inflows increase. In such circumstances, the RBI started selling government bonds to control the rupee appreciation and increase the liquidity in the banking system.

Reason behind the selling or (issuing) RBI bonds in the market?

There are a few crucial reasons why investors sell bonds on the secondary market.
For-example:- Any companies or NBFC or government issue bonds to get more capital for various things, which may include such as;

1. To refinance existing debts.
2. To raise money for new projects.
3. To make profit by trading bonds in the market.
4. To invest in schools, highways and hospital infrastructure.

Types of Bonds

• Treasury Bonds

It is one of the safest bonds in India because there is no credit risk. Such sorts of treasury bond are issued by central governments, which may have a maturity period between ten and thirty years, and the holder of these bonds will get a fixed interest rate.

• Corporate Bonds

The main reason is why corporate companies issue corporate bonds, because they want to expand their businesses. That’s why corporate companies issue bonds in the market to raise the capital for their businesses’ operations.

• Convertible Bonds

Convertible bonds (corporate bonds) are the financial instrument that get converted into equity shares. These bonds have a maturity date and pay interest to investors. If the investor does not convert their bond to equity shares before maturity, they will receive the face value of the bond.

• Floating Rate Bonds (RBI Floating Rate Saving Bonds)

Investment options are offered by the RBI to private individuals and NRI. The RBI does not fix the interest rates on RBI floating rate-saving bonds-the interest rate changes periodically, usually every two quarters (6 months). It protects investors from interest rate risk because the rates move with prevailing market fluctuations.

• Municipal Bonds

It is debt securities issued by local governments. They used to gather capital for ongoing development projects such as highways, hospitals etc. Such sorts of bond are exempted from tax. It is available for both short term and long term maturities.

 

Major Advantages of Bonds

Diversify Investor Portfolio :- The more you diversify your portfolio, the more you are safe from market fluctuations, and it can help you to reduce overall portfolio risk.

Steady Income Growth :- The bonds provide a fixed income source that pays out regular interest at a regular timeframe. Such sorts of features make bonds a more attractive option for the investor to earn regular income. Once the bond matures, you will receive the principal amount deposited before.

More Flexibility :- The bonds are safer than stocks. The value of a bond might change depending on the current interest rate. Bonds are typically more stable compared to equities.

Less Risky :- Bonds are less risky than equities (Stocks).  Because bonds are more stable than stocks. The bondholders are also paid back before equity holders are in liquidation.

 

Disadvantages of bonds

Fixed income:- One of the biggest disadvantages of fixed income investment, as we know that the interest rate is predetermined. When the interest rate goes up, the price of the bond typically falls. Hence, all the investors who hold the bonds may lose capital.

Risk of inflation:- Inflation erodes the purchasing power of income. As we know, bonds offer lower returns as compared to equities, which may not keep pace with inflation.

Credit Risk:- All bonds carry credit risk, where the issuer of a bond may default, all those who hold the bonds, leading to a loss of capital.

Fluctuations in interest rates:- The price of bonds and interest rates are inversely proportional to each other. If the price of bonds increases, the interest rates will decrease automatically or vice versa. Hence, the total value of your bond portfolio may be affected due to the rising interest rate.

 

Conclusion

The Bonds play a vital role in the global financial system. They help the state government, business corporations and other entities to raise capital. We have seen various types of bonds, such as Treasury Bonds, Corporate Bonds, Municipal Bonds, convertible Bonds and RBI Floating rate saving Bonds. Each bond have its advantages and risks.