Rewind. All eyes on the climate talks

The US Federal Reserve is meeting on December 15-16 and it is generally expected that the interest rate hike, pushed forward for so long, will come through.

Fed Chair Janet Yellen has been hinting that the central bank is finally looking to reverse the ZIRP (zero interest rate policy), which has not worked to provide jobs or to kick-start the economy, but has created asset price bubbles instead.

One suspects, however, that the newly discovered backbone is not yet strong enough for a meaningful hike and that it would be merely a token gesture to show resolve rather than provide direction.

A rise in interest rates does several things. For one, it provides a belated breather to savers and retirees who have seen their retirement plans vaporise. For example, if a US resident aimed to have a monthly income of $8,000 after retirement and if, when he planned for it, he was getting 8 per cent interest on a bank deposit, he needed to set aside $1.2 million. With 1 per cent on the deposit now, he only gets $1,000 a month or put in $8.4 million to meet his original planned needs. Where would he get that, being retired?

Low interest is hurting all pension funds, including state and corporate ones. At some point in future, pension funds may run out of money to meet their obligations. Low interest rates have not aided in spurring consumption, nor do they help savers.

Rising rates also alter the equation between debt and, riskier, equities. If the Fed raises rates more than expected, funds would start flowing from riskier emerging market equities to (relatively) safer US debt.

But Yellen would be whispering rather than yelling, so the hike would be a modest one, no more than 25 bps.

While rates have an impact, for India, it is the outcome of the Paris meeting on climate change on December 7-8 that is of greater importance.

The world agrees on the need to reduce carbon emissions and India has committed itself to a goal of obtaining 40 per cent of its energy needs from non-fossil fuels by 2030.

Today, about 44 per cent of India’s energy mix comes from coal and, in order to maintain GDP growth of at least 8 per cent, coal would be an important source of energy.

So developing countries like India are asking the developed countries to support them by both providing new, clean technologies, and by helping fund the switch to them. Hit by heavy smog, both Beijing and New Delhi are amongst the most polluted cities in the world.

As many as 134 developing nations have threatened a break down of the Paris talks if the developed nations try to push through a change in the UN Framework Convention on Climate Change. Under the existing framework, rich nations are obliged to help arrange finance for emerging nations to make a switch to clean energy.

How does climate change affect investors?

Consider how, as part of our efforts to address the issue, the government is shortly going to compel trucks aged 15 years or more, off the road. As many as 2.7 million trucks could go off the road by April. This would create demand for trucks, and for credit to fund their purchase.

India’s economy grew at an annual rate of 7.4 per cent in the quarter ended September 2015. The investment upswing is largely due to capex by public sector companies. India needs its GDP growth to top 8 per cent to raise millions out of poverty. And how the country can achieve this makes the Paris talks important, as a lot may ride on whether the developed nations will stick to their commitments to help fund emerging market efforts to control carbon emissions.

The writer is India Head, Euromoney Conferences

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