Weather derivatives could be a reality

Mumbai (C) The Financial Express

It’s that time of year to take out your pani patras and wager on the rain gods. And with commodity exchanges and traders betting on the weather, it is expected that a full-fledged weather derivative market could develop in India in the next few years. Indeed, commodity exchanges MCX and NCDEX have even asked outside agencies to look into formulating a mature, rain-based index.

In 2005-06, NCDEX launched the first rain index on the rationale that it could help fund managers hedge against the weather. The global weather derivative market is estimated at $12 billion, according to Pricewaterhouse Coopers.

While there is no trading on the weather in India yet, the rain index helps organisations understand monsoon trends and patterns. “As far as weather derivatives are concerned, these are at a nascent stage in India,” says Amar Singh, head, Angel Broking.

However, Shyamal Gupta, head of institutional business, Kotak Commodity Services Ltd, feels that a good rain index in India is still five to ten years away. “For a single, country-wide index, a lot of parameters would have to be taken into account. The weather department will also be have to be strategically involved,” added Gupta.

The world’s first exchange-traded weather derivative began on September 22, 1999, at the Chicago Mercantile Exchange