India’s National Commodity and Derivatives Exchange (NCDEX) plans to introduce the country’s first-ever weather derivatives, two sources familiar with the matter told Bloomberg.

The new financial instruments, designed to hedge risks related to rainfall, will be based on an index developed by one of India’s leading universities, the Indian Institute of Technology (IIT) Bombay, using data from the India Meteorological Department. NCDEX will seek regulatory approval once the products are finalized, the sources said.

India, where agriculture and related sectors account for around 16% of GDP, is looking to strengthen measures to mitigate the effects of climate change and water scarcity, which increasingly impact crop yields. Last year, the Indian government included weather derivatives in the list of approved trading instruments, recognizing their potential to help manage the risks posed by unpredictable rainfall.

The introduction of these rainfall-linked products comes amid increased regulatory scrutiny of derivative markets in India. Recently, SEBI (Securities and Exchange Board of India) imposed some of the strictest measures to curb speculative trading in equity options, and last week it extended its trading ban on derivatives linked to seven agricultural commodities.

Weather derivatives first emerged in the U.S. in 1997 on over-the-counter markets and have grown increasingly popular as companies seek protection against risks related to weather events. In some jurisdictions, regulators even require companies to evaluate how weather conditions pose threats to their businesses.

CME Group Inc. (NASDAQ: CME), which began offering weather-related derivatives on exchanges in 1999, provides products based on weather indexes linked to climate patterns in multiple U.S. and international cities. The trading volume of CME’s weather derivatives surged by more than 260% in 2023 compared to the previous year.