NCDEX to launch Chennai rainfall futures from Monday; expands India’s weather derivatives market

The National Commodity and Derivatives Exchange (NCDEX) will launch futures contracts linked to Chennai rainfall from Monday, expanding its weather derivatives offering beyond Mumbai. The exchange has received approval from the Securities and Exchange Board of India (Sebi) for the new contracts.

According to a circular issued on Friday, contracts expiring in September, October, November and December will initially be available for trading. Contracts with further expiries will be introduced in line with NCDEX’s contract launch calendar.

The Chennai rainfall futures will be cash-settled contracts and will attract a concentration margin. The open interest threshold has been set at 116,400 millimetres. NCDEX already offers rainfall-linked futures for Mumbai under its RAINMUMBAI contract.

What are rainfall futures?

Weather derivatives are financial instruments designed to help businesses manage the financial risks arising from unexpected weather conditions. Their payouts are linked to actual weather observations over a specified period rather than forecasts.

NCDEX’s rainfall contracts use rainfall data to hedge against the impact of weather variability on revenues, costs and business volumes. The exchange has said such instruments can reduce exposure to weather-related uncertainty and support investment in weather-sensitive sectors.

The Mumbai contract is based on Monsoon Cumulative Deviation Rainfall (CDR), which measures the deviation of actual rainfall from the 30-year historical average. The data is sourced from India Meteorological Department (IMD) rainfall observations at Mumbai’s Santacruz and Colaba stations.

The contracts do not predict future weather and are intended primarily for risk management rather than forecasting.

Who can use weather futures?

Businesses whose revenues or costs are affected by rainfall could potentially use such contracts to hedge their exposure. These include farmers and farmer producer organisations, agri-processors, banks with agricultural loan exposure and power distributors in a rainfall-deficit scenario.

In the event of excessive rainfall, construction companies, outdoor tourism operators, resorts and airlines could face disruptions and potentially use weather derivatives for hedging.

On the other side of the market, entities that benefit from a particular weather outcome could act as sellers. These could include hydropower generators during periods of excess rainfall or solar power producers when rainfall is deficient. Financial institutions and proprietary traders can also participate as liquidity providers and market makers.

Retail investors can trade

NCDEX said retail investors will also be able to trade the futures, although the contracts are primarily designed for participants with genuine weather-linked economic exposure. The exchange cautioned that speculation without an underlying exposure carries risks.

The contracts will be traded from Monday to Friday, with trading hours extending from 10 am to 11.30 pm/11.55 pm.

Weather derivatives are already established in international markets, including contracts offered by CME Group based on temperature indices. NCDEX’s expansion into Chennai represents another step towards developing an organised market for managing weather-related financial risks in India.

(With inputs from Informist)