Key Terms & Concepts — UPSC Mains
Parametric Weather Derivative
"Financial instrument that pays out based on an objective weather measurement such as rainfall or temperature, rather than on assessed loss."
A parametric weather derivative is a futures or options contract whose settlement is tied to a pre-defined, independently observed weather index — typically rainfall in millimetres, heating degree days (HDD), cooling degree days (CDD), or temperature thresholds at a specified weather station. Unlike traditional indemnity insurance, there is no loss assessment, claim filing, or surveyor visit: when the trigger condition is met, the payout is automatic and immediate. The trade-off is basis risk — the payout may not perfectly match the holder's actual loss. The Chicago Mercantile Exchange (CME) launched the world's first standardised weather derivatives (HDD/CDD futures) in 1999. In India these products fall within the commodity derivatives perimeter of SEBI under the Securities Contracts (Regulation) Act 1956 and SEBI Act 1992. NCDEX's RAINMUMBAI contract — India's first SEBI-approved parametric weather derivative — is cash-settled against the IMD Santacruz (Mumbai) rainfall reading, with a tick size of 1 mm of rainfall and a lot value of Rs 50 per millimetre; IIT Bombay is the technical partner.
GS3 (economy, agriculture, disaster risk transfer). High-value Prelims hook (SEBI, NCDEX, IMD link) and Mains case study for de-risking monsoon-dependent sectors, complementing PMFBY crop insurance with capital-market-based risk transfer.
- 1 Payout triggered by objective weather index, not by loss assessment.
- 2 Faster settlement than indemnity insurance; trade-off is basis risk.
- 3 Regulated in India by SEBI under SC(R)A 1956 and SEBI Act 1992.
- 4 NCDEX RAINMUMBAI: cash-settled, tick 1 mm, lot Rs 50/mm, underlying IMD Santacruz rainfall.
- 5 CME launched first weather derivatives (HDD/CDD) in 1999.
- 6 Useful for utilities, agribusiness, beverage, tourism and infrastructure firms.
NCDEX announced the launch of RAINMUMBAI — India's first SEBI-approved parametric weather derivative — on May 21, 2026, with IIT Bombay as the technical partner.
