India’s Green Projects: Currency Hedging Adds 6-8% to Costs

Currency hedging could increase the annual financing costs for green projects in India by 6-8%, according to a recent report. This finding comes from the India Sustainability Taskforce, a joint initiative by the Confederation of Indian Industry (CII) and IIM Ahmedabad.

The taskforce notes that this significant cost increment stems from a currency mismatch, making long-term hedging expensive or impractical for clean energy investments.

Key Financial Implications

• Short-term hedges alone add 6-8% to annual financing costs.
• Financing costs for established clean-energy sectors in India, such as solar and wind, are more than double those in advanced economies.
• Emerging green technologies face even higher capital costs due to limited track records and unproven revenue models.

This currency risk, compounded by country-risk perceptions and emerging-market risk premia, escalates the cost of international capital. Consequently, many global institutional investors, particularly conservative pension funds from North America and Europe, hesitate to commit significant funds to India’s climate-related projects.

Proposed Solutions for FX Risk

To mitigate these challenges, the taskforce has proposed a dedicated foreign exchange (FX) risk facility. This mechanism would be backed by public, multilateral, or blended-finance capital.

Such a facility aims to efficiently absorb a portion of the currency risk, a task individual project investors often find difficult to manage alone.

Introducing the Green Finance Institution

The recommendation for an FX risk facility is part of a broader financing framework for a proposed Green Finance Institution (GFI). This GFI is envisioned as an impact-oriented blended-finance platform.

The institution would deploy various instruments to reduce risks and mobilize private investment effectively.

• Guarantees
• Insurance
• Junior capital

The GFI’s primary objective would be to mobilize large-scale investment and lower the weighted-average cost of capital for a range of critical projects. These include green infrastructure, transition, adaptation, and resilience initiatives.

Reducing the cost of capital is not merely a minor financing issue; it is a critical factor for the widespread adoption of new green technologies. These comprehensive recommendations aim to enhance the flow of both domestic and international capital into India’s sustainable development efforts, supporting its climate and development goals.