Starting 29 May, India’s first exchange-traded rainfall derivatives contracts will be open for trading to retail and high-net-worth investors, power utilities, logistics firms, and agri-processing businesses, among others.
On Wednesday, the National Commodity and Derivatives Exchange Ltd (NCDEX), India’s largest agri derivatives exchange, unveiled its rainfall index, RainMumbai. The futures index contracts will be available for trading from 1 June to 30 September, the period of the south-west monsoon. Futures contracts represent the expected spot price on a future date.
“This is the first-of-its-kind index globally and we expect it to cater to a whole host of sectors that are exposed to rainfall risks,” said Arun Raste, managing director & CEO of NCDEX. “CME is the other exchange-traded weather derivative contract available, but that is for heat and snowfall, while others in Singapore are over-the-counter and based on tropical weather,” he added.
How it works
According to the India Meteorological Department (), the long-period average (LPA) rainfall during this season over 1991-2020 is 2,206.7 mm–539.7 mm for June, 794.9 mm for July, 524.3 mm for August, and 347.8 mm for September.
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.
Here’s an example. Say on 1 June, a power company anticipates a 10% deficit in June rainfall–a 53.9 mm shortfall. This means the expected spot price on the last trading day is 2,152.8 (2,206.7–53.9). If the futures for June are trading at 2,200 on 1 June, the company shorts the contract. Similarly, if the June futures contract is trading at 2,100, the company buys the index, expecting it to close at 2,152.8.
The last trading day of the contract is the business day preceding the last calendar day of the expiry month. The final settlement price of the contract is the IMD-determined spot value on the morning of the last calendar day.
To impart liquidity to these contracts, the plans to launch a market-making or a liquidity enhancement scheme in which empaneled brokers will offer two-way quotes for a fee to potential participants to make 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, and Zerodha.