NCDEX launches Chennai rainfall futures to hedge monsoon risks

National Commodity & Derivatives Exchange (NCDEX) has launched a rainfall-based weather derivatives futures contract for Chennai, allowing market participants to hedge financial risks linked to the Northeast monsoon.

The contract, RAINCHNNAI, is based on the cumulative deviation of rainfall from the Long Period Average (LPA) and will cover September, October, November and December. The Northeast Monsoon accounts for nearly 70% of Chennai's annual rainfall.

The launch expands NCDEX's weather derivatives offering after it introduced RAINMUMBAI earlier this year, India's first exchange-traded weather derivatives contract. The two contracts are designed to cover rainfall-related risks across the Southwest Monsoon from June to September and the Northeast Monsoon from September to December.


RAINCHNNAI will be cash-settled and use rainfall data from the India Meteorological Department's (IMD) surface rainfall observations at Chennai's Meenambakkam and Nungambakkam stations.

The underlying is the Cumulative Deviation Rainfall (CDR) from the LPA, with the methodology based on rainfall data over the past 50 years. The contract has a tick size of 1 mm and a lot multiplier of Rs 50 per mm. The minimum initial margin is 10%, while the maximum order size is 50 lots.

Trading will be available from Monday to Friday between 10 am and 11:55 pm. The daily price limit will have an initial slab of 6%, an enhanced slab of 3% and an aggregate limit of 9%.
The final settlement price will be based on the CDR spot value calculated on the expiry day. The last trading day will be the business day immediately preceding the last calendar day of the contract's expiry month.

“With RAINMUMBAI, we gave India its first regulated tool to manage monsoon uncertainty, driven by southwest monsoon from June-September. RAINCHNNAI takes that framework to the retreating Northeast Monsoon, September-December, which primarily impacts southern India, bringing nearly 70% of Chennai's annual rainfall in just four months,” said Kedar Deshpande, Chief Business Officer, NCDEX.


He said the two contracts together cover both major monsoon systems from June through December.
According to NCDEX, the CDR methodology tracks the deviation of actual rainfall from the LPA at the two Chennai weather stations, using historical IMD data as the benchmark.


Unlike conventional insurance products, weather derivatives are settled on the basis of observed rainfall data and do not require a loss assessment. This can allow participants to settle rainfall-linked exposures through a standardised exchange-traded contract.
The contracts are aimed at businesses and market participants with financial exposure to variations in rainfall, providing a market-based mechanism to manage the impact of weather uncertainty.