Forget stocks, you can now profit from Mumbai rains! Here’s how NCDEX’s unique weather futures work

For decades, the Mumbai monsoon has been a subject of everyday conversation around romanticised chai dates, gruelling local train delays, and city-wide flooding. But for India’s active trading community, the monsoon can now be an asset class. Giving India its first weather derivative instrument, the National Commodity & Derivatives Exchange Limited (NCDEX) has introduced an exchange-traded weather derivative contract, appropriately ticketed as RAINMUMBAI.

Weather derivatives are financial instruments that can help manage risk associated with adverse or unexpected weather conditions. Their payoff depends on actual rainfall recorded at a particular location during a specific period of time. “Lower exposure to weather variability makes weather-sensitive sectors more attractive to investors, supporting long-term investment and growth,” NCDEX said.

How does the RAINMUMBAI contract work?

NCDEX’s RAINMUMBAI contract is based on the Monsoon Cumulative Deviation Rainfall (CDR) – a daily measure of how much Mumbai’s actual monsoon rainfall deviates from its 30-year historical average (Long Period Average or LPA of 2,206.7 mm). Contracts are available for each of the four monsoon months – June, July, August, and September.The exchange explained that this is fundamentally different from insurance and settles purely on actual IMD rainfall data. “RAINMUMBAI hedges against revenue and volume impact caused by rainfall deviation — even when there is no physical crop loss. It is also exchange-traded, transparent, highly liquid, and requires no government intervention for settlement,” it said.

The data is sourced exclusively from IMD’s surface rainfall observations at two base stations in Mumbai’s Santacruz and Colaba. These are manually recorded by IMD officials and have 97–100% data availability.

It is important to note that these are derivative contracts and do not predict the weather. NCDEX said that the purpose of these contracts is risk management, allowing participants to hedge their financial exposure to rainfall variability, not to speculate on weather forecasts. The exchange does not promise any specific settlement outcome.

Who should buy and sell RAINMUMBAI contracts?

NCDEX said that entities which are negatively impacted by adverse rainfall conditions, say for example, farmers and FPOs facing yield loss, agri-processors worried about raw material shortages, banks with agri-loan exposure facing higher NPAs, and power distributors facing higher spot market procurement costs in a drought-like scenario, will be the likely buyers. In case of excess rainfall, construction companies facing project delays, beach resorts and outdoor tourism operators, and airlines facing operational disruptions would be the likely buyers of these contracts.

Sellers, meanwhile, will be the entities that benefit from the weather condition being hedged. NCDEX explained that in case of excess rainfall, hydropower generators benefiting from higher water inflow, water-intensive industries like cement and beverages will be the likely sellers. In case of rainfall deficit, solar power producers benefiting from more sunshine, outdoor event organisers, and financial institutions acting as market makers and providing liquidity will be the likely sellers.

Can retail investors participate?

Just like any other commodity, futures on NCDEX, retail investors will be able to trade these weather derivatives. “RAINMUMBAI is designed primarily as a risk management (hedging) instrument for entities with genuine weather-linked economic exposure. However, like all exchange-traded futures contracts, it can also be accessed by market participants — including financial institutions and proprietary traders — who act as liquidity providers and market makers. Speculation without underlying exposure carries its own risks and should be approached with caution,” the exchange said.

Why was Mumbai chosen as the pilot city?

Mumbai’s monsoons are highly volatile, with IMD’s Santacruz and Colaba stations offering 97–100% data availability. Additionally, Mumbai is considered to be India’s financial and commercial capital. “Mumbai serves as a natural financial benchmark, maximising market participation,” NCDEX said.

The exchange will launch four futures contracts under Mumbai rainfall with expiry at the end of each monsoon season month, which are June, July, August and September. “To support day‐one traction, a Liquidity Enhancement Scheme (LES) has been implemented. Under this, a Market Maker provides continuous two‐way quotes within a prescribed spread. This ensures immediate liquidity, efficient price discovery, and smooth entry and exit for participants,” the exchange said.

How will profits and losses be calculated?

NCDEX explained that a multiplier of Rs 50 per millimetre (mm) of rainfall deviation has been set. Each 1 mm move in the CDR (Cumulative Deviation Rainfall) spot equals Rs 50 per lot. The maximum order size is 50 lots per trade.

“For example, if a company shorts 38 lots and the CDR spot falls by 221 mm (a 10% rainfall deficit), the P&L from futures would be approximately Rs. 4.2 lakh — partially offsetting revenue losses in the business,” the exchange explained.

The contracts are cash-settled, and no physical delivery is involved. On the expiry day of the contract, the final settlement price (FSP) equals the CDR spot value as published by NCDEX. All open positions are automatically closed and cash-settled on a T+2 basis at the FSP. Traders will be able to trade in these contracts from Monday to Friday, from 10 am to 11.30 pm / 11.55 pm.

Weather derivatives are already traded widely globally. Chicago Mercantile Exchange (CME Group), for example, offers standardised futures and options contracts based mainly on temperature-based indices for multiple cities across the US, Europe, Japan and parts of Asia. NCDEX said that the launch of India’s first-ever weather derivative marks an important step in aligning with global practices in weather risk management.

CME’s weather derivatives, which were introduced in the US back in 1997, are based on temperature deviations in major American cities. NCDEX said that RAINMUMBAI “adapts this proven concept for India’s monsoon-driven climate risk, using rainfall deviation (CDR) instead of temperature deviation, and targeting sectors where rainfall, not temperature, is the primary economic driver. Japan’s Tokyo CAT index (Cumulative Average Temperature) offers another global precedent for this model”.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)