Currency Hedging Adds 6-8% to Green Project Financing Costs

A new report by the India Sustainability Taskforce, a joint initiative of the Confederation of Indian Industry (CII) and IIM Ahmedabad, has found that currency hedging can add 6-8% to the annual financing costs of green projects in India.

The taskforce noted that most green projects in India generate revenues in Indian rupees, while international investors typically lend in hard currencies such as the US Dollar or Euro, creating a currency mismatch that raises the effective cost of overseas financing.

'Hedging long-term currency exposure is effectively impossible or very costly: rolling short-term hedges can add 6-8% to annual financing costs,' the report said.

The taskforce proposed a dedicated foreign exchange (FX) risk facility backed by public, multilateral or blended-finance capital, which could absorb part of the currency risk more efficiently than individual project investors.

The report emphasized that reducing the cost of capital is crucial for adopting green technologies at scale and addressing the elevated cost of capital facing Indian green investments.