Weather Derivatives: With Refernce to Agricultural Sector in India

In today's technology based society 1/3 of business activities in the world are directly or indirectly affected by weather changes. It influences our daily lives, choices and has an immense impact on corporate revenue and earnings. In today's environment, climate change is creating new risk but also new opportunities for all sectors of society. Inaddition, IMF (2011) climate changes have significances for financial market. Innovative instruments for example (weather derivatives, catastrophe bonds) offer a practice to maintain some climate related risk. The weather has become quite unpredictable because of global warming and burning of fossil fuels. In India Agriculture, Hydroelectric power generation & agriculture industry are heavily dependent on monsoon. India is a country where agriculture is the major source of income for majority of the population. Over 58% of the rural households depend on agriculture as their principal means of livelihood. Agriculture is one of the largest contributors to the GDP. According to the Central statistical office (CSO), agriculture and allied sector (including agriculture, livestock and fishers) contributes 16.1% percent to the Gross Value Added (GVA) during 2014–2015. The impact of weather on the Indian economic is very compelling because agriculture is the backbone of the Indian economy and agriculture in India largely depends on Monsoon, weather alone accounting 90% of volatility of crop yields. Until recently there were very few financial tools offering security against weather related risk. However, the inception of the weather derivative by making weather a tradable commodity has changed all this. The weather derivatives and cat-linked securities are new instruments that determine the transfer of weather and natural disasters risk to a country to international capital market. The interest of individual and institutional investors for these securities is high because of low correlation with other financial instruments. The development of weather risk market is important for farmers and companies from both the developed and developing countries to diversification their portfolio. This paper tries to explain the concept; functioning and application of weather derivatives and studies the need for weather derivatives contracts in the context of the Indian market. With this paper the researcher also try to examine the feasibility of weather derivatives as a risk management tool in agriculture sector of India.