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.
