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Critical Topics and Their Significance for the UPSC CSE Examination on March 15, 2025

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Green Bonds to Masala Bonds

For Preliminary Examination:  Current events of national and international importance

For Mains Examination: GS III - Economy

Context:

The demand for Sovereign Green Bonds (SGrBs) in India has received a luke response from the investors. The two new SGrBs worth Rs 10,000 crore auctioned by the Reserve Bank of India (RBI) in November and January faced muted response from the investors as bonds valued at Rs 7,443 crore remained unsold. This came despite a rule change allowing NRIs and foreign portfolio investors to participate without restrictions

Read about:

Sovereign Green Bonds (SGrBs)

Masala bonds

Key takeaways:

• A bond serves as a financial instrument for raising capital. It can be issued by a government or a corporation to secure funds. Government bonds, known as G-secs in India, Treasuries in the United States, and Gilts in the United Kingdom, are backed by sovereign guarantees, making them one of the safest investment options. However, their security also results in relatively lower returns, known as yields.

• The yield on a bond represents its effective rate of return, which fluctuates based on the bond’s price. For example, consider a 10-year government security with a face value of ₹100 and an annual coupon payment of ₹5. An investor purchasing this bond for ₹100 would receive ₹5 each year for ten years, along with the repayment of ₹100 at the end of the term. In this case, the yield or effective interest rate amounts to 5%.

• Sovereign Green Bonds (SGrBs) are issued by government entities, such as the Government of India, which introduced a framework for these bonds in 2022. This framework defines "green projects" as initiatives that enhance resource efficiency, lower carbon emissions, support climate resilience, and restore natural ecosystems.

• The Securities and Exchange Board of India (SEBI) introduced the idea of blue bonds in its ‘Consultation Paper on Green and Blue Bonds as a Mode of Sustainable Finance.’ SEBI emphasizes that India has significant potential for deploying blue bonds across various segments of the blue economy. The World Bank defines the blue economy as the sustainable utilization of oceanic resources to foster economic growth, enhance livelihoods, and generate employment while preserving marine ecosystems. Meanwhile, the European Commission categorizes it as all economic activities linked to oceans, seas, and coastal regions.

• Masala Bonds are rupee-denominated bonds, meaning they allow funds to be raised from foreign markets in Indian currency. As per the Reserve Bank of India (RBI), Indian corporations, statutory bodies, and banks are eligible to issue these bonds in international markets.

• The Organisation for Economic Co-operation and Development (OECD) defines Social Impact Bonds as a type of social investment that follows a "pay-for-success" model, where returns depend on the program’s effectiveness. This structure facilitates the tracking of progress, ensuring transparency for investors.

• According to the OECD, Sustainability-Linked Bonds are financial instruments whose structural or financial features are linked to the issuer’s achievement of predefined sustainability or Environmental, Social, and Governance (ESG) goals. These bonds adopt a forward-looking approach, requiring issuers to demonstrate sustainability improvements within a specified timeframe.