NCDEX signs MoU to launch India’s first parametric weather derivatives

The National Commodity and Derivatives Exchange (NCDEX) has signed a Memorandum of Understanding (MoU) with the India Meteorological Department (IMD) to develop India’s first parametric weather derivatives, according to a recent article from The Economic Times.

The MoU, which was signed in late June, lays the groundwork for the launch of the country’s first weather derivatives, a long-anticipated market instrument designed to help farmers and allied sectors hedge against climate-related risks such as erratic rainfall, heatwaves, as well as unseasonal weather events.

As part of this partnership, NCDEX will develop a rainfall-based derivative product, among others, using historical and real-time datasets sourced from the IMD.

For years now, India market participants and those controlling financial market structure have been discussing weather derivatives, weather futures and options.

Artemis reported last year that the NCDEX of India was undergoing work on the construction of a suite of weather indices to facilitate the trading of weather futures, after the central government had added weather to its approved derivatives list.

Additionally, Artemis also first wrote about India’s National Commodity & Derivatives Exchange’s plan to launch a weather index based product back in 2008 and exchange-traded weather derivatives and futures have come up a number of times over the years since.

The new parametric weather derivative product is expected to support seasonal and location-specific contracts, enhancing the ability to manage weather-related risks across various different sectors such as agriculture, transportation, and allied industries.

In addition, the collaboration also includes plans for capacity building, joint research, and training programs for stakeholders, including Farmer Producer Organisations (FPOs), agri-traders, policy think tanks, and analysts.

“While our endeavour is to launch it early so that stakeholders benefit. We will need time for developing a product considering southwest and eastern monsoon cycles and then test our hypothesis before we submit it for regulatory approval and it is difficult to give any concrete timeframe at this juncture,” NCDEX Managing Director and CEO Arun Raste told the Press Trust of India (PTI).

Clearly, the development of parametric weather derivatives represents a notable step towards improving climate risk management in India. By providing a market-based tool to hedge against weather-related uncertainties, the initiative could support greater resilience in agriculture and related sectors.