We still lack a robust climate risk hedging tool, says NCDEX chief

National Commodity and Derivatives Exchange launched India's first rainfall-based weather derivatives contract to help businesses hedge monsoon-related risks

The National Commodity and Derivatives Exchange (NCDEX) on Wednesday announced India’s first exchange-traded weather derivatives contract, Rain Mumbai, based on rainfall data in Mumbai sourced from the India Meteorological Department (IMD). The contracts will be traded from May 29. Arun Raste, managing director and chief executive officer (MD & CEO), NCDEX, says nearly half the country is dependent on the farm sector and yet there is no proper market-linked product to hedge monsoon risks. In an interaction with Khushboo Tiwari in Mumbai, he talks about expansion into new product segments. Edited excerpts: 

Could you explain the rationale behind the rainfall derivatives product and how market participants could use it? 

Rainfall affects agriculture directly and changes consumption behaviour because nearly half the country is still dependent on the farm sector. At present, there is no proper market-linked product to hedge these risks. Crop insurance exists, but it is limited largely to agriculture and depends on government declarations such as drought or flood situations.

 

Many sectors beyond farming are exposed to rainfall risk. For instance, if a power company depends significantly on hydropower and rainfall is weak, crop insurance will not help it. Similarly, FMCG (fast-moving consumer goods) companies, fertiliser firms, seed companies, and lenders to the rural economy are all exposed to monsoon risks. Rainfall derivatives provide a mechanism to hedge such exposures. 

Why was Mumbai selected as the reference point for the pilot contract? 

Mumbai sits almost at the centre of the monsoon movement across India. The southwest monsoon reaches Kerala first and gradually moves northward, with Mumbai being a key midpoint. Another important factor was data availability. The IMD has extensive historical rainfall data for Mumbai. Also, Mumbai’s rainfall patterns have economic relevance for surrounding regions. Cities such as Nashik, Pune, and Surat can potentially use Mumbai-linked contracts as a proxy for hedging rainfall risk. 

How do you see the weather derivatives market evolving from here? 

Climate risk is also economic risk, and until now there has not been a proper hedging instrument for it. The current pilot consists of four monthly contracts — June, July, August, and September — based on long-period average rainfall data over the last 30 years. Going ahead, we are exploring eastern monsoon contracts and temperature-linked products as well. Temperature contracts could potentially run throughout the year. 

What steps are being taken to ensure adoption and liquidity in the new contracts? 

Before launching the product, we consulted a wide range of stakeholders, including farmers, FMCG companies, brokers, and other market participants, to assess whether there was genuine demand. The feedback was positive. 

We are also considering a liquidity enhancement scheme permitted by the Securities and Exchange Board of India (Sebi) to improve participation. A circular on that could come shortly. 

NCDEX has gone through a difficult phase in recent years. What are the next steps for the exchange? 

Our ambition is to become a multi-segment exchange. Historically, NCDEX was seen largely as an agriculture-focused exchange, but there was never any restriction preventing us from expanding into non-agri commodities or equities. In commodities, liquidity tends to remain concentrated on one exchange, so we are focusing on products where there is currently no strong market presence. 

We are launching steel scrap contracts and are evaluating platinum contracts. We also plan to re-launch pepper contracts. The idea is to build liquidity in products that are under-served, and eventually become the price discovery centre for those commodities. 

What are NCDEX’s plans for equities and MF segment? 

Our fundraising of ₹770 crore last year was specifically aimed at entering the equities segment. However, our focus is not on weekly derivatives. We want to build presence in the cash market. India still has very low equity market penetration compared with many global markets. Even after rapid growth in recent years, only a small percentage of Indians participate in equities or MFs. Our strategy is to expand participation beyond the top cities. 

We already work with around 750 farmer producer organisations (FPOs) and cooperatives. We have trained several of them to become MF distributors after clearing National Institute of Securities Markets (NISM) certification. This helps bring regulated financial products into rural areas that were previously under-served or exposed to unregulated schemes. 

In equities too, we plan to leverage our network of commodity brokers by enabling them to offer equity products on the same platform and terminal.

 

What timelines are you looking at for these initiatives? 

MF distribution initiatives could begin as early as next month or by July. The equities segment launch is targeted for December. 

How can participation from foreign portfolio investors (FPIs) and domestic investors be improved further? 

Any effort to increase participation — whether from FPIs or domestic investors — helps deepen markets and makes them more mature. At the same time, we are particularly focused on expanding domestic participation because there is significant untapped capital within the country, especially in rural areas.