Time ripe to launch weather derivatives in India

KS Badri Narayanan | Updated on November 01, 2019

Thick rain clouds seen over Chennai. File Photo   -  The Hindu

This year, the weather gods were benevolent to Indian farmers. The South-West monsoon brought record-breaking rainfall, particularly during August and September. The North-East monsoon too, has turned active in the last few days, stoking high hopes in the southern and eastern belts.

Almost all Indian States have received excess rainfall, with major reservoirs brimming at near-full capacity. Thanks to good water storage, agriculture production for the kharif and rabi seasons is expected to be strong.

Though the monsoons exceeded expectations this year, India has always faced unpredictable monsoons. Besides, non-seasonal weather conditions too, spoil the harvest for farmers.

With change in weather conditions of late, a few advocate the importance of launching derivative products based on rainfall, temperature, moisture, and wind, among others, to help farmers and corporates hedge against these risks.

Even the Securities and Exchange Board of India has actively been considering a proposal to allow trading in weather derivatives. In July this year, SEBI said it is examining the feasibility of allowing derivative contracts based on weather and freight in the Indian commodity segment.

It’s understood that the SEBI panel is analysing the pricing models as there is no underlying for such derivatives. Media reports suggest SEBI has asked commodity exchanges to work on various parameters to evolve a standard product, based on temperature and rainfall, besides region-specific factors.

In fact, the National Commodity and Derivatives Exchange (NCDEX) has been planning to launch weather futures, from as far back as 2003. It was even working on a rain index, a tool to track the monsoon’s progress, jointly with the Indian Meteorological Department. However, it could not make much headway, as awareness on derivative products itself was very poor at that time.

The first derivative product (based on average temperatures) was launched through the exchange mechanism in 1999 on the Chicago Mercantile Exchange. With the developed markets experiencing hassle-free trading in the last three decades, India too needs such products, as investors are more mature now, given their experience in agri commodities trading.

Weather risk affects farmers, during both pre- and post-monsoon periods. Besides, it will have a significant direct and indirect economic impact across sectors, such as insurance, FMCG, tourism and even sports.

It is high time Indian exchanges too have derivatives on weather, to help farmers, consumers, corporates and even insurance companies hedge against weather risks.

The product will taste real success if the data is easily and quickly available across the country and is cost effective.

Published on November 01, 2019

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