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

The report argues that high currency hedging costs in India make foreign debt nearly as expensive as domestic debt, hindering renewable energy targets. It proposes a government-sponsored FX hedging facility that could reduce hedging costs by nearly 50% and government support costs by up to 54%. The analysis suggests that while the expected cost of such a facility is 3.5 percentage points per year, the government would need a capital buffer of approximately INR 14.26 million/MW over 10 years to maintain a BBB- sovereign rating.

• India faces significant barriers to meeting its 2022 renewable energy targets due to a shortage of debt and unfavorable 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 roughly 7 percentage points to the cost of debt, which makes fully-hedged foreign debt nearly as costly as domestic debt. A government-sponsored FX hedging facility could reduce these costs to an expected 3.5 percentage points per year, representing a reduction of nearly 50% compared to market rates.
• The implementation of an FX hedging facility could significantly lower the cost of renewable energy and the associated government subsidies. If the government bears the expected cost of the facility, the cost of debt for developers would drop by 7 percentage points, the cost of renewable energy would decrease by 19%, and the cost of government support would fall by 54%. If the cost is passed to the developer, the cost of debt would decrease by 3.5 percentage points, renewable energy costs by 9%, and government support by 33%.
• To manage the risk of extreme foreign exchange rate movements and maintain a sovereign rating of BBB-, the government would require a cumulative capital buffer of INR 14.26 million/MW over 10 years, which is 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} }