Analysis: NCDEX expands beyond agri commodities with second rainfall derivative launch

The National Commodity and Derivatives Exchange (NCDEX) on Tuesday launched ‘RAINCHNNAI’, building on the launch of its first rainfall futures for Mumbai launched in May.

In an interview with FOW, Arun Yadav, vice president and product head at NCDEX, said the addition of Chennai completes a monsoon-risk management framework spanning India’s two main rainfall systems, helping create a regional asset class linked to climate risk.

Unlike the broader Indian subcontinent, which relies on the Southwest monsoon from June through September, Chennai receives roughly 70% of its total annual rainfall during the Northeast monsoon, spanning October through December.

The city receives about 1,400 millimeters of rain annually during this period. This seasonal reliance creates acute operational and revenue volatility within localised urban supply chains and infrastructure projects.

“By launching the Mumbai and Chennai contracts, we are covering a monsoon risk management cycle that runs from June through December, covering both of India's major monsoon systems,” said Yadav.

The contract is built on a Cumulative Deviation Rainfall (CDR) model, which tracks the deviation of actual rainfall from the Long Period Average (LPA) at Chennai's Meenambakkam and Nungambakkam stations, benchmarked against decades of India Meteorological Department (IMD) data.

The Mumbai-based exchange said that ‘RAINCHNNAI’ will enable participants to manage rainfall-linked risk through a cash-settled futures contract.

The methodology of ‘RAINCHNNAI’ is similar to the Mumbai contract, based on LPA determined from past 50 years and the actual rainfall.

The launch follows a key regulatory change in March 2024, when the government expanded the list of permissible underlying assets under the Securities Contracts (Regulation) Act (SCRA), 1956, to include weather.

Yadav said the regulatory change prompted NCDEX to explore rainfall and temperature-linked derivatives.

“Rainfall is a very localised phenomenon. As rainfall volatility is very high in India, weather risk remains one of the largest unhedged volume drivers for Indian enterprises,” Yadav said.

Rainfall directly or indirectly affects almost every major economic sector in India, creating potential demand from insurers, reinsurers, power and utilities companies, agribusinesses, commodity firms and proprietary traders.

Managing weather volatility

When asked about the measures taken by the exchange to tackle extreme volatility in Chennai’s northeast monsoon, Yadav highlighted that the rainfall in the region has been highly volatile in the past few years.

He said that the exchange has taken several measures on this front.

NCDEX extended trading hours for rainfall contracts from 10 a.m. to 11:30 p.m., significantly longer than the traditional 10 a.m. to 5 p.m. session for agricultural commodities.

"Since NCDEX predominantly trades agricultural commodities, the trading period was from 10 am to 5 pm. When we launched rainfall contracts, we realised that rainfall could occur at any point of time,” said Yadav.

“The perfect solution would have been round-the-clock trading for the contract. Since it is not permitted in India, we have extended the trade timings."

Yadav said that NCDEX can impose additional margins when market conditions warrant, adding that weather forecasts and rainfall expectations would increasingly be reflected in futures prices before the actual weather event occurs.

“The spot market can be volatile, but futures markets start incorporating expectations much earlier,” he said.

The NCDEX had introduced a liquidity-enhancement scheme for the Mumbai contract to help with its early traction. For Chennai, NCDEX is initially taking a more measured approach to liquidity.

“Looking at the participation that we received for ‘RAINMUMBAI, we are planning to build a natural reception for the Chennai contract,” Yadav said.

The exchange expects good reception from both the retail and institutional investors for the rainfall contracts.

“We are in touch with the corporates. Most of them have given a very positive response to the contract,” he added.

A second test after Mumbai

The exchange's Mumbai product has gained early momentum, with around 2,000 contracts traded in an average a day. The average daily trading volume (ADTV) is around ₹100 to ₹ 150 million (£1.16m).

NCDEX expects that the participation for the rainfall contracts will increase gradually as more companies assess their exposure to weather-related risks.

The exchange is examining other weather variables, including temperature, to create a family of weather-linked instruments.

Expanding the asset class beyond farming

Historically focused on physical agricultural commodities like oilseeds, pulses, and spices, NCDEX’s rollout of weather futures represents a structural shift toward non-commodity financial instruments.

Yadav said that NCDEX is exploring to grow their non-agricultural commodity suite.

“We are exploring everything. We will be coming into equity derivatives soon. We are also exploring to expand our portfolio in the weather derivatives segment.”

NCDEX in July launched NCDEX Nidhi, a next-generation mutual fund transaction platform. The mutual fund platform aims to deepen mutual fund distribution beyond the top 100 cities by leveraging its extensive agricultural ecosystem and network of farmer producer organisations (FPOs).

Arun Raste, former chief executive of NCDEX, told FOW that the launch of mutual fund platform is the initial step for the exchange to enter the equities segment.

The exchange plans to launch its equity cash platform by January 2027 and start equity derivatives trading in mid-2027.

India’s major agri commodity exchange partnered with Tata Consultancy Services (TCS) in February to provide an enterprise-grade, scalable trading and surveillance platform, as the trading venue prepares to enter the equity derivatives market.

Meanwhile, NCDEX appointed Vikas Goel as new chief executive in August replacing Arun Raste whose tenure concluded on June 6 and was subsequently extended till the end of July.

Kedar Deshpande, chief business officer at NCDEX, told FOW in June that the exchange will focus on building a sustainable, multi-participant ecosystem for the newly launched rainfall contract over the next three years.