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(Bloomberg) — India’s largest agricultural exchange has introduced its first weather derivatives, allowing investors to hedge against monsoon-related risks.
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The futures contracts, which will start trading from May 29, will be anchored to rainfall levels measured at two weather stations run by the India Meteorological Department in Mumbai, The National Commodity & Derivatives Exchange Ltd. said on Tuesday.
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“India has lived with monsoon uncertainty for centuries,” NCDEX Managing Director and Chief Executive Officer Arun Raste said at the launch in Mumbai. The new product, called RAINMUMBAI, “provides every stakeholder with a regulated, scientific tool to manage this uncertainty.”
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The product comes at a time of heightened weather risk for India, with the IMD forecasting a weaker than normal monsoon, and expecting the onset of the ocean warming pattern El Niño to suppress the rains. Traders are watching for impacts on the country’s largely rainfed farms, which employ about 45% of the workforce and account for 15% of the GDP.
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NCDEX’s contracts will pay out based on how far actual rainfall deviates from the 30-year average of 2,206 millimeters. A buyer hedging against a weak monsoon would profit if rainfall falls short, while a seller profits if it doesn’t. Unlike most existing weather insurance frameworks, a claimant will not need proof of loss to trigger the settlement.
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The offering is underpinned by an earlier decision by the market regulator Securities and Exchange Board of India that notified weather as a tradeable good, ending years of regulatory stasis.
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NCDEX aims to attract participants across weather-sensitive sectors like agriculture, energy, infrastructure, transport and retail, among others.
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Whether such a product will become mainstream remains to be seen, NCDEX’s Executive Vice President Arun Yadav said, adding that the exchange has already engaged with several participants.
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—With assistance from Mary Hui.
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(Updates with details about the intended areas of investment in seventh paragraph. A previous version corrected the date of the start of trading.)
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