The push for weather derivatives continues in India


The Indian financial markets have been pushing for regulation to be introduced that would allow for the use of commodity options and derivatives, including weather derivatives, has been under way for nearly two years now. We’ve written about this previously, here and here, with the latter article discussing moves by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) to force an amendment in the countries Forward Contracts (Regulation) Act, 1952 (FCRA) to allow for the trading of weather derivatives, futures and options on exchanges.

Now ASSOCHAM have issued another plea to the prime minister of India calling for the Forward Contracts (Regulation) Amendment (FCRA) Bill 2010 to be approved in an upcoming budget session. Implementation of the amendment will provide autonomy to the Forward Markets Commission (FMC), India’s commodity market regulator.

“FCRA will have huge economic implications for development of major stakeholders like the domestic agriculture sector and small and medium enterprises (SMEs) as both seek protection against the significant volatility in commodity prices,” said the chamber president, Mr R.N. Dhoot. “Besides, once it comes into force, the FCRA bill will further enable overcoming current shortcomings in the commodity market,” said Mr Dhoot.

This is all part of the continued democratization of the commodity markets of India, which ASSOCHAM say will help lead to an open futures market, improving the price discovery process and allowing farmers and the like to participate in the markets.

“The amended FCRA bill will enable the regulator to co-ordinate globally under mandate of G20 and will also enable the market to introduce new and innovative hedging products like options and weather derivatives which can be tailored to the risk appetite of farmers to hedge risks,” said Mr Dhoot.

Improving price discovery and price dissemination will help to stabilise market forces and lessen price volatility in the marketplace. ASSOCHAM say this will allow effective risk management, fair returns to farmers and stimulate investment in the agricultural sector.

Given the size of the agricultural sector in India, if this push to enable weather derivatives trading is successful it could very quickly become one of the largest such markets in the world.

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