Comparison of Rainfall and GDP: Feasibility of Introducing Rainfall Derivatives in the Indian Weather Risk Market

Dileep N
International Journal of Finance, Insurance and Risk Management, Volume 12, Issue 3, 125-140, 2022
DOI: 10.35808/ijfirm/299

Abstract:

Purpose: The rainfall is an economic indicator for the Indian economy. Because more than half of the Indian population is engaged in agriculture, and they depend on rainfall for their farming activities, along with farming, other sectors like manufacturing, transportation, banking, construction, and others are directly or indirectly affected by rainfall. The proposed study attempts to know the interrelationship between the changes in rainfall and the GDP growth rate. The study demonstrates the opportunity and feasibility of introducing rainfall index-based derivatives in the Indian weather risk market. Design/methodology/approach: The study considered the average annual rainfall data of all 36 meteorological subdivisions collected by the Indian Meteorological Department (IMD). The GDP annual growth rate data was obtained from the World Bank's official website, https://www.worldbank.org. The study performed simple correlation and regression with the SPSS software. Findings: The results of the correlation matrix show that there is a positive interrelationship between the selected two variables. According to the regression analysis, rainfall has a significant positive effect on India's GDP growth rate. This result shows that there is a need for rainfall index based derivatives in the Indian weather risk market to absorb the rainfall risk. Practical implications: The result of this paper helps to rainfall-dependent industries to absorb the rainfall risk that affects their business revenue. Even insurance and reinsurance companies can also use these kinds of derivatives to hedge the pooled rainfall risk of the public. The government can take steps to frame the policies related to the trading of these instruments on the exchanges. The researcher can carry out further studies on the pricing of rainfall index-based derivatives. Originality value: According to the authors' knowledge, this is the first empirical study to determine the interrelationship between the changes in rainfall and the GDP growth rate over a longer period of time.


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