India not ready yet to chase monsoon
Preeti Mishra, MyDigitalFC.com Mar 15 2012
Chasing The Monsoon had author Alexander Frater literally pursue the rain god across the length and breadth of India. The book also highlighted the dependence of the agrarian community on the vagaries of the monsoon. Yet, regulations governing Indian commodity exchanges have not come forward with mechanisms that would help farmers hedge against the weather, something that Weather Futures aim to do. “We are waiting for the (Forward Contracts Regulation Act) amendments to get cleared in Parliament. When and whether it will happen is something that only the government can tell,” says Ram Seshan, CEO, National Commodity and Derivative Exchange (NCDEX). NCDEX already has rain indices, but this is only for purposes of display and dissemination of information, explains Seshan, emphasising the importance of having a Weather Futures trading platform in the country.
While a thriving $1 billion weather (betting) market exists, albeit illegally, in India, farmers, agro-processors, exporters and importers can participate in weather trading legally only when certain amendments are introduced to the FCRA.
As of now, Indian regulations do not define weather as a commodity, thus impeding trading. The law does not allow indices trading so a suitable instrument for Indian conditions like precipitation indices (related to rainfall) cannot be designed. It does not allow participation of financial institutions like banks, pension or mutual funds, which is a pre-requisite in weather futures trading. If FIs participate, it will lead to a better hedging and price recovery. And the most important factor - options and swaps are not a part of the commodity market. If allowed, these instruments will attract corporates and FIs to participate, increasing volumes and making it possible to design a suitable weather contracts, explains B C Khatua, chairman of the Forwards Market Commission. Meanwhile, the Chicago Mercantile Exchange (CME), long recognising that nearly 30 per cent of the US economy depends on the weather, started weather futures in the country. The CME has various weather products related to temperature, snowfall and hurricane, among others. The exchange has now evinced interest in participating in the Indian weather market after having established a robust infrastructure and contract designs in the US. "Both CME and a few other US-based OTC exchanges are keen to participate in the Indian market, but we need to set up a proper infrastructure in place. We do not even have historical time series data giving weather-info in spite of having almost 580 weather stations in the country," says founder and director of Hyderabad-based Anuj Kumbhat, Weather Risk Management Services (WRMS).
The company will probably lead the weather market-trading platform if it gets the necessary approvals. The trading platform would allow a participant to buy or sell the value of a temperature and rain (or precipitation) index at a specific future date. What this would mean is that power companies could trade in high degree days and low degree days contracts, in Mumbai for instance, estimating how much electricity would be consumed during those days, while farmers could use weather derivatives to hedge against poor harvests caused by deficient rainfall or drought.
While it may take time for the FCRA amendment to come though, WRMS is busy setting up infrastructure in place, which in this case is automated weather stations across the country. It has already roped in donor agencies like Food Foundation to fund the project cost, and according to Kumbhat, the company will establish 500 weather stations across 10 Indian states. WRMS is encouraged that the Tamil Nadu government has already taken a proactive step and announced plans to set up 300 stations in the state.
"Having such a infrastructure in place will help us to get the trading organised as we will have access to relevant information (like historical time series data, weather forecasts). For now, we can also use these stations to provide weather-related data, for which we have already got enquiries." The company also intends to start a weather fund with an initial corpus of Rs 15 crore, which would increase gradually, allowing it to take position in the trading platforms once the amendment comes through.