Currency hedging may raise green project financing costs by 6-8%

A joint taskforce by the Confederation of Indian Industry (CII) and IIM Ahmedabad has warned that currency hedging could add 6-8 per cent to the annual financing costs of green projects in India. This, it says, raises the effective cost of foreign capital and may discourage global institutional investors from committing funds at scale.

The issue stems from a fundamental mismatch: most green projects in India earn revenue in rupees, while international lenders typically provide funds in hard currencies such as the US Dollar or Euro. The taskforce noted that rolling short-term hedges to cover long-term currency exposure is either prohibitively expensive or practically impossible, adding significantly to project costs.

This currency risk compounds existing challenges, including country-risk perceptions, emerging-market risk premia, and project-level uncertainties. Conservative foreign investors, particularly North American and European pension funds, view unmitigated currency risk as a major barrier, leading them to shy away from large commitments to India's climate-related projects.

To address this, the taskforce has proposed a dedicated foreign exchange risk facility backed by public, multilateral, or blended-finance capital. Such a facility could absorb currency risk more efficiently than individual project investors, making overseas financing more attractive.

The recommendation is part of a broader framework for a proposed Green Finance Institution (GFI), envisaged as an impact-oriented blended-finance platform. The GFI would deploy guarantees, insurance, junior capital, and other instruments to reduce risks and mobilise private investment.

The report highlights that the elevated cost of capital is a central issue. Even mature clean-energy segments like solar and wind face financing costs in India that are more than double those in advanced economies. Emerging technologies such as battery storage, offshore wind, and green hydrogen face even steeper costs due to limited track records and unproven revenue models.

The proposed GFI aims to combine concessional and commercial capital, deploying catalytic tools like FX-risk solutions, guarantees, and climate insurance. Its core mission would be to mobilise investment at scale and reduce the weighted-average cost of capital for green infrastructure, transition, adaptation, and resilience projects, supporting India's broader climate and development goals.