India’s NCDEX expands parametric weather derivative offering to Chennai rainfall

The National Commodity and Derivatives Exchange (NCDEX) has expanded its range of parametric weather derivative products, launching a futures contract to enable participants to hedge the financial exposure of rainfall extremes and variability in the city of Chennai and surrounding area.

It’s the second location in India where rainfall weather derivatives are now available, after the NCDEX launched its first contract for Mumbai back in May this year.

That first Mumbai rainfall contract launch marked the culmination of a particularly long journey for the NCDEX, as the exchange had first begun discussing a plan to launch a weather-index based hedging products back in 2008.

Now, with the Mumbai weather futures contract having seen trading activity on the exchange, NCDEX looks set to begin a roll-out to other rain impacted areas of India, with the next being Chennai.

The NCDEX explains why Chennai is an important and relevant location for weather hedging, “Chennai, one of India’s largest metropolitan and industrial centers, is uniquely exposed to rainfall variability due to its dependence on the Northeast Monsoon (September to December), which contributes the majority of the city’s annual rainfall. Chennai (Meenambakkam/ Nungambakkam IMD stations) records ~1400mm annual rainfall, annually with ~70% concentrated in September-December Unlike most Indian cities that receive substantial precipitation from the Southwest Monsoon, Chennai derives a significant share of its yearly rainfall from weather systems originating over the Bay of Bengal, including low-pressure systems, depressions, and cyclones. This concentration of rainfall within a relatively short season often results in pronounced intra-seasonal variability, creating financial and operational challenges for sectors such as urban infrastructure, construction, transportation, retail, logistics, hospitality, water management, insurance, and energy. ”

The exchange further stated, “Rainfall-based weather derivative contracts are introduced to provide market participants with an efficient mechanism to manage financial risks arising from fluctuations in rainfall. Futures contract based on rainfall as underlying parameter settles on measured precipitation at a specified reference station over a defined observation window, as notified by the Exchange. The contract provides a transparent, regulated, and exchange traded platform for hedging rainfall related financial exposure and facilitates efficient price discovery, with financial settlement and no physical delivery obligation. Thus contract will serve as an effective risk management instrument for participants exposed to rainfall variability and supports mitigation of weather related financial uncertainties using reliable rainfall data.”

The NCDEX’s weather risk hedging products are designed as a risk management tool for a wide range of potential users, including in the agriculture, construction, utilities and energy, retail, infrastructure, banking and financial institutions, transport and logistics sectors.

These responsive parametric weather derivative contracts are based on surface rainfall and weather station observations, which enables those seeking to manage the risk of rainfall to go beyond traditional protection, such as insurance or financial protection from the government.

It’s a further signal of the importance of weather hedging and the potential for parametric contracts to enable those exposed to extreme rainfall in India to hedge some of the financial impacts from weather extremes and variability.