India to Unveil Global First Rainfall Index for Weather Derivatives on May 29
India's First Exchange-Traded Rainfall Derivatives Contracts Set to Launch
India's National Commodity and Derivatives Exchange Ltd (NCDEX), the country's largest agri derivatives exchange, has unveiled its rainfall index, RainMumbai, which will be open for trading to retail and high-net-worth investors, power utilities, logistics firms, and agri-processing businesses, among others. The futures index contracts will be available for trading from 1 June to 30 September, the period of the south-west monsoon.
The launch of RainMumbai marks a significant milestone in the derivatives market, as it is the first-of-its-kind index globally. The index will cater to a whole host of sectors that are exposed to rainfall risks, according to Arun Raste, managing director & CEO of NCDEX. In comparison to other weather derivative contracts, CME offers exchange-traded contracts for heat and snowfall, while other exchanges in Singapore operate over-the-counter and are based on tropical weather.
| Exchange | Weather Derivative Contract |
|---|---|
| CME | Heat and Snowfall |
| Singapore Exchanges | Tropical Weather (Over-the-Counter) |
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According to the India Meteorological Department (IMD), the long-period average (LPA) rainfall during this season over 1991-2020 is as follows:
| Month | LPA Rainfall (mm) |
|---|---|
| June | 2,206.7 - 539.7 |
| July | 794.9 |
| August | 524.3 |
| September | 347.8 |
A trader or merchant who expects June rainfall to exceed its LPA will take a 'long' position on the rainfall futures index. Conversely, if they expect rainfall to fall below normal levels, they will 'short' the index. For example, a power company that anticipates a 10% deficit in June rainfall - a 53.9 mm shortfall - will take a 'short' position on the futures contract.
The NCDEX plans to launch a market-making or a liquidity enhancement scheme to impart liquidity to these contracts. Empaneled brokers will offer two-way quotes for a fee to potential participants, making entry and exit easy. NCDEX, which began operations in 2003, specialises in spices and guar complex derivatives, posting an average daily turnover of ₹1,000 crore. Its shareholders include NSE, LIC, PNB, Groww, and Zerodha.
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Investor Takeaway
India's first exchange-traded rainfall derivatives contracts will be open for trading on May 29.
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