Is delayed monsoon impacting your income? Here's how you can offset the losses through weather derivatives

From a normal working-class citizen to farmers, everyone has glued their eyes towards the sky, waiting for the monsoon to arrive. Monsoon has inherently been India’s major economic booster, from rural areas to urban metros. Everyone’s life depends on it, and the late arrival of it this year has created anxiety amongst all. Farmers' income is tied to monsoon, and so are everyone else’s pockets, as poor agricultural yields result in lower income for farmers and higher inflation for consumers. The extent of loss may vary for all, but it remains a worrisome picture. However, this time we can take advantage of the delay of the monsoon to cover our losses to some extent.

Like investors, stock market traders, institutions and commodity traders hedge their positions with derivative products, farmers or ordinary class citizens too can cover for their losses with newly introduced weather derivatives. NCDEX launched a derivatives contract for Mumbai rains (RAINMUMBAI), which is now actively traded on the NCDEX platform. The contract is calculated on the basis of daily rainfall in the city of Mumbai and its deviation from the long-term average.

The futures contract is cash settled based on the cumulative deviation rainfall (CDR), compiled using official Indian meteorological data for Mumbai rains. The daily deviation is calculated as follows

Daily rainfall is compared with the long-period average (LPA) during the monsoon season from June to September. Meanwhile, the traded rainfall of CDR is calculated as follows

The rain data is calculated daily at 9:00 am for the past 24 hours. Meanwhile, futures contracts trade on NCDEX with an expiry on the last business day of the month. Each contract is traded in a multiplier of ₹50 per mm.

Who can benefit from it?

Farmers: Monsoon is the only driver for the majority of water for non-irrigated land in India. A delay in the monsoon prompts farmers to shift to small crops, which provide lower yields. The loss can be hedged through trading in rain futures on NCDEX.

Banks & NBFCs: Financial institutions like banks and non-banking financial institutions that have high exposure to agriculture credit anticipate higher NPAs during the drought period. Hedging through weather derivative contracts could help minimise the provisioning for NPAs.

Construction firms: Construction companies are the first ones to receive restrictions during a water crisis led by deficient rainfall, which leads to delays in the completion of projects and increases the cost. Such an impact can be offset through hedging in weather derivative contracts.

Power generation companies: The hydroelectric companies, which make excess units during surplus rainfall, have to bear the brunt of excess supply units, leading to losses. They can create an opposite position to benefit during surplus rainfall periods.