Reaching India’s Renewable Energy Targets Cost-Effectively: A Foreign Exchange Hedging Facility

This executive summary explores the potential for a government-sponsored foreign exchange (FX) hedging facility to reduce the cost of renewable energy in India. It argues that high market-based currency hedging costs currently make foreign debt nearly as expensive as domestic debt, hindering the achievement of 2022 renewable energy targets. The document analyzes a proposed facility that would cover debt payments for USD loans, estimating its expected cost and the potential reductions in government support and energy costs.

• India faces significant barriers to achieving its 2022 renewable energy targets, including a shortage of debt and inferior debt terms. Private capital for infrastructure during the 12th Five Year Plan was estimated to be 27% lower than required, and high costs, short tenors, and variable interest rates increase the cost of renewable energy in India by 30% compared to the US.
• Market-based currency hedging in India is expensive, adding approximately 7 percentage points to the cost of debt, which makes fully-hedged foreign debt nearly as expensive as domestic debt.
• A government-sponsored FX hedging facility for 10-year currency hedges has an expected cost of approximately 3.5 percentage points per year, which is 50% below market rates. If the government bears this cost, the cost of debt for developers could drop by 7 percentage points, the cost of renewable energy by 19%, and the cost of government support by 54%. If the cost is passed to the developer, the cost of debt reduces by 3.5 percentage points, renewable energy costs by 9%, and government support by 33%.
• To manage risks and prevent default, the government could implement a capital buffer. To achieve a sovereign rating of BBB-, the cumulative capital buffer requirement for 10 years would be INR 14.26 million/MW, or nearly 30% of the underlying loan amount. Additionally, the risk-premium for maintaining this buffer is calculated at 2.76 percentage points.

APA

Farooquee, A. A., & Shrimali, G. (2015). Reaching India’s Renewable Energy Targets Cost-Effectively: A Foreign Exchange Hedging Facility. Climate Policy Initiative. https://www.climatepolicyinitiative.org/wp-content/uploads/2015/06/Reaching-Indias-Renewable-Energy-Targets-Foreign-Exchange-Hedging-Facility-_-Executive-Summary.pdf

Chicago

Farooquee, Arsalan Ali, and Gireesh Shrimali. Reaching India’s Renewable Energy Targets Cost-Effectively: A Foreign Exchange Hedging Facility. Climate Policy Initiative, 2015. https://www.climatepolicyinitiative.org/wp-content/uploads/2015/06/Reaching-Indias-Renewable-Energy-Targets-Foreign-Exchange-Hedging-Facility-_-Executive-Summary.pdf.

Wikipedia

{{cite report |last1=Farooquee |first1=Arsalan Ali |last2=Shrimali |first2=Gireesh |title=Reaching India’s Renewable Energy Targets Cost-Effectively: A Foreign Exchange Hedging Facility |publisher=Climate Policy Initiative |date=June 2015 |url=https://www.climatepolicyinitiative.org/wp-content/uploads/2015/06/Reaching-Indias-Renewable-Energy-Targets-Foreign-Exchange-Hedging-Facility-_-Executive-Summary.pdf |access-date=17 August 2026 |via=Climate Insights Directory}}

BibTeX

@techreport{farooquee2015reaching, author = {Farooquee, Arsalan Ali and Shrimali, Gireesh}, title = {{Reaching India’s Renewable Energy Targets Cost-Effectively: A Foreign Exchange Hedging Facility}}, institution = {Climate Policy Initiative}, year = {2015}, month = jun, url = {https://www.climatepolicyinitiative.org/wp-content/uploads/2015/06/Reaching-Indias-Renewable-Energy-Targets-Foreign-Exchange-Hedging-Facility-_-Executive-Summary.pdf}, urldate = {2026-08-17}, note = {Indexed by Climate Insights Directory} }