Sovereign and financial institutions have been the major anchors of India's sustainable bond market issuance since 2023, S&P Global Ratings said in a recent release.

Meanwhile, corporate issuers flock to alternative funding sources, including those from local banks and policy-linked entities such as the Indian Renewable Energy Development Agency, which they deem more attractive, S&P said.

Issuance costs and a volatile pricing premium define corporate issuers' cost-benefit analysis, S&P credit analyst Luis Solis said.

Following peaks from 2023 to 2024, India's sustainable bond issuance dropped to about $2 billion in 2025, with 62% being green bonds and 38% being social bonds, the rating agency said.

The dynamic points to a rising disconnect between market activity and the country's reported $250 billion yearly climate financing needs, S&P said.

Low sustainable issuance stems from a change in appetite as labeled bonds are no longer considered to have a clear benefit compared to other borrowing sources, the rating agency said.

Targeted tax incentives could improve the sustainable bond market and put a stop to the decline in sustainable bond issuance, the analyst said.

Without these backing measures, the country's energy transition would mainly rely on equity financing, commercial bank loans, and traditional unlabeled corporate debt rather than direct corporate labeled bond issuances, in S&P's view.