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

India's green projects are facing a significant challenge in securing foreign capital due to currency hedging requirements, which could increase their annual financing costs by 6-8%. This is according to the India Sustainability Taskforce, a joint initiative of the Confederation of Indian Industry (CII) and IIM Ahmedabad. The taskforce noted that most green projects generate revenues in rupees, while international investors typically provide funding in currencies such as the US dollar and euro.

This mismatch exposes projects to currency risk, which can be costly to mitigate. '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. This additional risk comes on top of other uncertainties, increasing the overall cost of international capital for Indian clean-energy projects.

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