India's Green Projects Hit by Currency Hedging Costs: 6-8% Premium on Financing
A new report from the India Sustainability Taskforce has highlighted the issue of currency hedging in green project financing, estimating that it could add 6-8% to annual costs. The taskforce, a joint initiative of the Confederation of Indian Industry (CII) and IIM Ahmedabad, notes that most green projects generate revenues in Indian rupees while international investors lend in hard currencies like the US Dollar or Euro.
This creates a currency mismatch, making it difficult for project developers to hedge long-term currency exposure. According to the report, rolling short-term hedges can add 6-8% to annual financing costs, exacerbating country-risk perceptions and emerging-market risk premia.
The taskforce has 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. This recommendation forms part of a broader financing framework proposed for a Green Finance Institution (GFI), aimed at mobilizing private investment and reducing risks.
The report emphasizes that reducing the cost of capital is crucial for adopting new green technologies at scale, and notes that Indian clean-energy segments face significantly higher financing costs compared to advanced economies. The taskforce suggests that a GFI could address these barriers by combining concessional and commercial capital and deploying catalytic instruments like FX-risk solutions, guarantees, and climate insurance.