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Rainfall derivatives have arrived in India. We need 3 steps to make them work

The new RAINMUMBAI contract covers the monsoon months and makes a payout based on the occurrence and magnitude of predefined weather conditions. It’s different from insurance.

This is the time of the month when large parts of India wait desperately for some sign of the monsoon. Many businesses carry monsoon risk on their books. Too much or too little rain can cause lots of damage.

So, when the NCDEX issued a circular last week announcing a Liquidity Enhancement Scheme for Mumbai Rainfall Futures (ticker: RAINMUMBAI), one naturally got excited. The contract covers the monsoon months and makes a payout based on the occurrence and magnitude of predefined weather conditions. This is different from insurance, which compensates for actual loss. It’s the beginning of a market for monsoon risk, and it is about time India had one.

How will the RAINMUMBAI contract actually work?

Imagine you run a mid-sized construction company in Mumbai with a large infrastructure project underway. Your July budget, which factors in some predictable rainfall, assumes your crew works 20 days, unlike the usual 25 days in non-monsoon months. But if July is an unusually heavy rainfall month, your workers cannot be on site, and your losses increase.

With RAINMUMBAI, you can buy a July futures contract that is structured to pay off when Mumbai’s measured rainfall in July exceeds a certain level, say 700 mm, for the........

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