Currency Hedging Costs Threaten India's Green Projects

India's green projects are facing a significant hurdle in securing foreign capital due to currency hedging costs, according to a report by the India Sustainability Taskforce. The taskforce, a joint initiative of the Confederation of Indian Industry (CII) and IIM Ahmedabad, found that hedging long-term currency exposure can add 6-8% to annual financing costs for green projects in India.

The issue arises from the mismatch between the currencies in which most green projects generate revenues (Indian rupees) and those in which international investors lend (hard currencies like the US Dollar or Euro). This creates a currency risk that adds to country-risk perceptions, emerging-market risk premia, and project-level uncertainties.

To address this issue, the taskforce has proposed a dedicated foreign exchange (FX) risk facility backed by public, multilateral, or blended-finance capital. The report highlights the need for reducing the cost of capital as a central determinant of whether new green technologies can be adopted at scale.