Rate hikes and rising food prices

Originally published in the Hindu Businessline on 31st October 2011. The article was co-authored by Malini Anand (freelance writer). HBL somehow missed her name.

http://www.thehindubusinessline.com/features/mentor/article2582871.ece?homepage=true&ref=wl_home

Dr D. Subbarao, Governor of the Reserve Bank of India (RBI), is in a Catch-22 situation. If he doesn't raise interest rates, he stands accused of doing nothing to tame inflation. But if he does raise interest rates, his ability to control inflation, as the general public sees it, is rather limited. As can be seen from the graph below, the increase in interest rates by RBI hasn't necessarily resulted in an easing of inflation in past few years in India.

The Wholesale Price Inflation for September 2011 stood at 9.72 per cent. Fuel and Food, which together comprise 22 per cent of this index, have been a major reason for the increase. Fuel and Power inflation increased to 14.09 per cent, due to Rs 3.14-rise in the price of petrol on September 1, 2011. Food inflation was at 10.6 per cent in the week ending October 8, as against 9.32 per cent in the week before that, providing no relief to the aam admi.

Interestingly, food forms nearly 14 per cent of the Wholesale Price Index, and increasing the interest rates simply isn't the solution to controlling the food prices. There are several reasons for this.

Higher rural income
First and foremost, rural India is eating better. This is primarily because of a surge in rural income. As analyst Akhilesh Tilotia of Kotak Institutional Equities points out in a report titled ‘This Time is Ripe', the total income in rural India has gone up by 138 per cent to Rs 6,81,400 crore during a five-year period ending in 2009.
It need not be said this is primarily because of the Mahatma Gandhi National Rural Employment Guarantee Scheme, which has led to a significant flow of money into rural India.

Over and above this, the United Progressive Alliance is getting for the next Lok Sabha elections with the introduction of the Food Security Bill. The Bill is currently up for discussion and draft guarantees food to priority households i.e. those below the poverty line, as well as other poor families who have been classified as ‘general households'.
This move if and when it goes through is expected to drive food prices up all over the world, because of the sheer numbers (population) that we have.

There are other problems as well which will continue to drive food prices up in the years to come. A report brought out by DWS Investments suggests that “dramatic increases in the irrigation of crops across northern India have substantially depleted the region's groundwater. This would mean lesser water for irrigation across the Gangetic plain which produces a major part of the grain that India consumes.”

Grain and food production is also threatened by other long-term factors. One is the continued expansion of some of our biggest cities at the cost of taking over agriculture land. As environmentalist Mr Lester Brown writes in Outgrowing the Earth: The Food Security Challenge in an Age of Falling Water Tables and Rising Temperatures, “As a country industrialises and modernises, crop land is used for industrial and residential development.Secondly, as rapid industrialisation pulls labour out of the countryside, it often leads to less double cropping.”

Shrinking acreage
In fact the world is running out of land for agriculture. The world renowned hedge fund manager Mr Jeremy Grantham explains this in his newsletter titled Time to Wake Up: Days of Abundant Resources and Falling Prices Are Over Forever, “Only Brazil, and perhaps the Ukraine, has really large potential increments of output. Elsewhere, available land is shrinking. We have, though, had impressive productivity gains per acre in the past, and this has indeed helped a lot. But, sadly, these gains are decreasing.”

What also does not help is the prospect of higher atmospheric temperature.

Crop ecologists use a rule of thumb that for each 1-degree-Celsius rise in temperature above the optimum during the growing season, we can expect a 10-per cent decline in grain yields.”

As Brown points out “In India, the giant Gangotri Glacier, which helps keep the Ganges river flowing during the dry season, is retreating. The Ganges is, by far the largest source of surface water irrigation in India.”

Many of the above factors are already translating into almost doubling the Price of Food Index, Dhaanya, at NCDEX, the leading agricultural commodities exchange in the country.

The factors are way beyond the control of Mr Subbarao and he cannot do anything about it by increasing interest rates. So, will his interest rate hikes bring down the inflation rates? We doubt!

NJY: The Visionary

Mr. N J Yasaswy, NJY for most of us, passed away on Saturday October 8th, 2011. The founder of ICFAI, was of 62 years.


I had gone on my honeymoon to Srinagar. On our way from Srinagar to Pehalgaon, on a foggy chilly morning, we stopped for tea amidst the mountains. Just next to the tea shop, there was a small office with a board, IFEN (ICFAI Flexi Education). I laughed. And then marveled at the reach and penetration of ICFAI.

True to the vision of NJY, ICFAI reached, touched and penetrated into every conceivable market for Business education in India. I recall NJY telling us in one of the meetings, “Everyone is entitled to education. Isn’t an average student entitled to higher education in the Business domain? Does one have to crack the CAT and be the top 2,000-3,000 in a country where almost 10 lakh graduates want to pursue an MBA every year?” 
These were not merely words; he actually made a Business education possible for everyone. From 2 years full time MBA, to part-time and distance MBA, to executive MBA, he offered them all under the ICFAI umbrella. He has left behind an empire of 11 ICFAI Universities, 8 Icfai Business Schools, and many more Icfai National Colleges.

I joined ICFAI in 2002 as a Doctoral student. Just a week into the program, before meeting the man himself, accounts of his brilliance reached my years. I was told that he was the all India 1st rank holder for CA, CS and ICWA. And that the ICAI still kept his answer scripts as model answer scripts on their website. Well I never checked it myself.

But, I did not need to Whether he was the 1st rank holder in all three (CA, CS and ICWA) or not and whether ICAI kept his answer scripts as model papers or not, the man was a genius. Being a teacher, I am used to talk more and listen less. But when he spoke, everyone listened. Including me. Out of Respect and Awe. Not Fear.

I had the opportunity to interact with him on numerous occasions. Over the years, I happened to be in various committees and would meet with him in the review meetings very frequently. He used to take a lot of pride in the smallest of achievements of any of the ICFAI constituents. His eyes would twinkle as he would tell us about the Icfai cases appearing in many foreign author books, or ICMR making money through adsense, or ICFAI Tripura being a threat to the local Universities in North East. He had Big Dreams for ICFAI.

Last year when I was leaving IBS Hyderabad, I had met him and chatted with him for more than an hour. I was a bit skeptical at first. I was nervous that he might get angry, or he might not understand my reason for leaving. But I was so very wrong. He was extremely happy for me. He told me that I am doing the right thing. He told me that it was important for me to go outside the Icfai system and prove myself and that I was taking a good decision in concentrating my efforts on research, which also gave me the flexibility to focus on my family.

His consent and his approval of my decision meant the world to me. He told me that I was welcome to rejoin IBS after my stint at ISB. For any employee, this would be the greatest compliment, that she is welcome back in the same organization. And NJY, the founder of ICFAI, himself gave me that compliment.

The man is no more. But he has touched the lives of lakhs of people, Icfai alumini, faculty, staff, prospective students and the Indian corporates. We are all grateful to him for his vision and his creation. May his soul rest in peace.

The Economic Spiral

The last quarter (July-September) has seen most of the economic indicators going for a roller coaster ride in India. In September, Interest Rate was increased yet another time and the Oil Marketing Companies increased the Oil prices once again. Inflation has touched newer heights and the Index of Industrial Output (IIP) plunged to a 21 month low in July.

The rupee has been plummeting on average and the stock market indices have been volatile to say the least.
IIP growth decelerated sharply to 3.3% in July 2011 from 8.8% in June 2011, and from 9.9% in July 2010. The uncertainties in policymaking and the increasing loss of credibility of the UPA government are causing many companies to defer their investment and expansion plans.

The IIP compiled in India has in its scope the Mining, Manufacturing and Electricity sectors. The increasing dependence of the government on debt leaves no doubt in the minds of the companies that the government will not be able to spend on infrastructure and give boost to the economy if need be.

Increasing the interest rates makes borrowings more expensive for the companies and individuals. Hence they postpone or cancel their expansion plans. This results in depleted producer sentiments and reduced capital spending. This in turn results in a further lower IIP.

Owing to high costs of borrowing, a few companies might resort to layoffs or pay-cuts, leaving individuals with lower disposable income. Also, higher interests on deposits might lure individuals to save now and consume later. Both, lower disposable income and higher savings, results in lower consumption, leading to lower sales and profits, lower production, lower IIP, hence, lower stock prices. Looming threat of the US and European nations going back into recession is not helping the situation.

The exports to these nations are bound to be hit. While a falling rupee will benefit the exporters, the demand itself might drop.
The impact of an oil price increase on inflation cannot be ignored as well. It must be noted that increased oil prices directly result in an increase in inflation as it is a major component of the Consumer Price Index. It also results in increased airfares, shipping costs, public transport etc., thereby indirectly increasing the inflation further.

By letting the OMCs increase the price of oil, the government is contributing to a further rise in inflation on one hand, and adding salt to the wounds of the common man by further increasing the interest rates to control the same inflation.

Mr. Pranab Mukherjee was quick to point out that petrol has been deregulated and it is the OMCs who have in their review decided to increase the price. True. But then, who reviews and makes the decisions for these companies? And who benefits from such decisions?

It is clear from Table 1 that the Government being the majority shareholder in these companies, must be approving the price rises. Also, these companies distribute whopping amounts as dividends, not to mention the contribution to the exchequer in the form of taxes and duties (see table 1)!

Table 1:

Source: CMIE prowess database and Annual Reports of the companies

In the year 2010-2011, the amount of subsidies towards petroleum products doled out by the central government was Rs38,400 crores (source: union budget 2011-2012). A look at table shows that the OMCs together pay much more to the government in the form of taxes, duties and dividends.

Our central banker Mr. Subbarao claims that the rise in interest rates would curb inflation. Figure 1 clearly shows that increasing the interest rates have not been able to rein in the inflation in the past one year. So yet another rise in interest rate seems to be in vain.

Figure 1:

What seems to be the case is that the inflation in India is demand driven. So the need of the moment would be to ensure supply, increased productivity and efficiency rather that curbing the demand.

Curbing the demand would not help in achieving the growth targets. It would push the country into a slow growth or recessionary phase. That would be a real shame, considering that we have one of the brightest economists and a man responsible for the India
turnaround story as our current Prime Minister.
Source: RBI

Bourses, competition and technology

http://www.thehindubusinessline.com/industry-and-economy/taxation-and-accounts/article2523500.ece


These are interesting times for the Indian Stock Exchanges. We might see a new player in the stock exchanges arena soon, MCX-Stock Exchange (MCX-SX). Since long, MCX-SX's application has been pending with the Securities Exchange Board of India (SEBI) for a license to operate as a full- fledged stock exchange.

National Stock Exchange (NSE), since its inception in 1994, has revolutionized capital markets in India. Due to initiatives taken by NSE, the Indian markets are now more efficient. NSE has monopoly in the futures and options and wholesale debt markets and is the clear market leader in equities and gold ETF trading. 

This forced financial intermediaries to use technology which provides data feeds from NSE for all segments. On the other hand, BSE has more than 7,000 companies which are not listed on NSE, and hence traders were forced to separately work on BSE's online trading platform (BOLT).

Competition between exchanges

In addition, the Multi Commodity Exchange of India (MCX), market leader in commodity derivatives, provided its feed on software called ODIN, developed by its parent company (Financial Technologies). While intermediaries found it difficult to switch between softwares, they had no choice.

These technological woes of the brokers seem to be ending as competition between the exchanges intensifies. While a monopoly does enjoy economies of scale, but competition is always good for the end users. The fear of losing a customer to a competitor propels the companies to innovate, serve and optimize.

Owing to a recent development, wherein the Bombay High Court advised the SEBI to settle its dispute with the MCX-SX regarding its ownership structure which is preventing SEBI from allowing it to become a full fledged stock exchange, in a move to combat the almost certain entry of MCX-SX in the equity and derivatives trading arena, arch rivals, NSE and Bombay Stock Exchange (BSE) are joining hands to provide their stock price feeds through a single trading platform.

In another development just two months back, the Competition Commission of India (CCI), armed with the new competition law which became fully enforceable in the month of June this year, slapped a fine of Rs 55 crore on NSE for waiving transaction charges and abusing its dominant position in the Currency Derivatives (CD) segment. NSE has now obtained a stay by the Competition Appellate Tribunal (Compat) on the penalty, but has ended its zero-pricing policy with effect from August 22nd, 2011. In the same order, the CCI had instructed NSE to share its application programme interface code (APIC) with ODIN users.

Also, Financial Technologies (FTL), the promoter company of MCX and MCX-SX, a global leader in providing exchange and trading technology platforms and solutions, launched DMA (Direct Market Access) live a couple of days back. DMA live will provide clients with greater control and direct access to their trades, reducing transaction costs, increasing speed and efficiency of transaction.

More exchanges

This is meant to benefit the financial institutions and brokers. On one hand the consolidation of exchanges continues, on the other hand new exchanges are successfully capturing market share. Key to their success is technology.

Researchers are still trying to find an answer to whether fragmentation is good or bad for the investors. Maureen O'Hara and Mao Ye in their research paper, “Is market fragmentation harming market quality?”, published in the Journal of Financial Economics in June 2011, find that “fragmentation affects all stocks; more fragmented stocks have lower transactions costs and faster execution speeds; and fragmentation is associated with higher short-term volatility but greater market efficiency, in that prices are closer to being a random walk”.

Their results show that “fragmentation does not appear to harm market quality” and “are consistent with US markets being a single virtual market with multiple points of entry”. However, in the US there is the National Market System (NMS) linking all the different exchanges and investors can see prices of all the markets, compare and then choose the best.

MCX-SX, the potential new player in the exchange industry in India, with the backing of a global leader in exchange and trading technology (FTL), may change the game for the existing Indian players, NSE and BSE.

Economics and Politics behind demand for Smaller States

Published in Rediff on 22nd July 2011

http://www.rediff.com/business/slide-show/slide-show-1-the-economics-behind-demand-for-smaller-states/20110722.htm

The Telengana movement in the state of Andhra Pradesh has picked up momentum again and is causing losses to the tune of thousands of crores to the exchequer during Bandhs, not to mention the loss to the students who are actively involved in the movement.

The rationale of Underdevelopment stated by the Pro Telangana activists for the formation of a separate state seems a bit stretched, especially since the socio- economic data presented in the Srikrishna committee report and analysis by various other independent bodies do not point towards a dismal state of affairs.

The Gross District Level Domestic Product, which is The most important indicator of economic growth, has grown the fastest for the Telangana region, whether one includes or excludes Hyd, from 00-01 to 07-08.

Other important parameter, supply of water and electricity to the farmers, has also shown remarkable improvement over the years. For example, the Net agricultural area under Irrigation, land productivity, use of electricity for agriculture and growth of electricity consumption, have all improved much faster for the Telangana region (excluding Hyderabad) than the Coastal Andhra.

The expenditure on Education, which is one of the most important social issue, under the Sarva Shiksha Abhiyan (SSA), for the Telengana (excl Hyd) and the Coastal Andhra regions seem to be small and the difference can be easily reduced or taken care of with little bit of effort.

The numbers speak of the growth story of the region of Telangana. If the region was neglected say 20 years back, it should not be the reason for the formation of a separate state now.

If the politicians really want to help the people of Telangana, they should plan a drive to systematically get more resources from the state and central government to these regions. Rather than asking for a new state they should compete for the resources. The MLAs from these areas should put in effort for this. The common man is concerned about development and knows that forming a separate state may not be the wisest of solutions to it.

There are many other aspirants who have not yet filed the applications, but surely are watching the developments on Telangana very closely. Bodoland (Assam), Kosal (Orissa), Ladakh (Jammu and Kashmir), Vindhya Pradesh (Madhya Pradesh), Maru Pradesh (Rajasthan), are just a few examples.

As far as the economic development of these smaller aspiring regions are concerned, every state would have some developed and some not-so-developed regions. If all the not-so-developed regions start demanding for a separate state, there will be no end to the number of states that we might end up having.

While a few of these demands may be genuine, many of these cases seem to be driven entirely because of Political motivations and aspirations. The Center needs to take a strong stand and focus on the facts and figures related to the socio-economic growth in the region rather than bowing down to the bullying tactics of the politicians.

If smaller states are formed on the principles of ‘self-determination’, it is going to result in unstable states. Today, the Telangana people may get a separate state by showing intolerance towards Andhra people. Tomorrow, there will be clashes with people of other ethnic groups.

As Etzioni (1993) puts it in his research paper in “Foreign Policy”, what is required is “fuller representation, responsiveness, and democratization”. Not “self-determination by fragmentation”.

MBA Aspirants Speak UP

This post is not meant to hurt anyone. It it just a compilation of a few funny moments/experiences during interviews/presentations at a leading B-School in India. The compilation below highlights the state of primary, secondary and undergratuate education in the country.

It also highlights what the two years of going through the process of an MBA degree can do to the same students, as I have seen many of these students transform in the two years and ending up with plum jobs, doing extremely well in life.

1. Mutinity.
2. Kohfi Annan, Koffi Annan, Cophy Annan...All three in the same presentation by the same student!
3. Assacinatio....read Assasination.
4. I myself....
5. As far as my strengths are concerned, I am motivated, integrated and enlightened.
6. It extends the whole of India, except the state of J&K.
7. Mr. Natwar Singh is described as the one of the leaders of the congress party of the India.
8. Nitish Kumar is an Engineer. So he will do well.
9. Emotional Intelligence without emotions or intelligence is nothing.
10. Identifying Emotions- It is the process by which we can identify emotions.
11. Understanding Emotions-It is the process by which we can understand emotions.
12. Using Emotions- It is the process by which we can use emotions.
13. Managing Emotions- It is the process by which we can manage emotions.
14. The light gets enlightened.
15. There are many sensexes but for BSE it is the top 100 companies in the Government.
16. I want to conclude the IPO market.
17. Md. Younus has been helping very poor women with crediting.
18. Micro finance is the basic need of Indian countries like poor countries.
19. In India, the employees are paid according to their capabilities (what's the norm in other countries?)
20. They (Phillippines) have a low speaking population.
21. When the sun sets there, the people in offices there stop working. And when the sun sets there, the sun rises in India. Then we start working. So we have a 24*7 advantage...On Outsourcing.
22. Immediate effects of the flood immediately caused water clogging.
23. People died through electrician.
24. Communications through land lines and ATMs were blocked...ATMs?...used for communication?
25. What was the reason for Mumbai floods?- The drainage system...Oh! I thought it was the rains!
26. Wings are made for speed. Our country is on a speedy path...on the future of the Airlines Industry.
27. Low cost airlines do not provide foods and accommodation.
28. No frills airlines don't provide any comfort. Not even a complimentary airhostess.
29. Ordinary people could only see the plane flying on top of their heads.
30. I would like to introduce some introduction.
31. Mumbai-Pune expressway was cancelled for the first time.
32. The poor are very brand conscious.
33. Pakistan attack Kashmir to capture it.
34. The other Kashmir Government should be banned.

The Ten Experiences in a Slum

1. The first thing that would strike you in a slum is the noises that would engulf you as soon as you enter. A band playing the latest blockbuster for somebody's wedding, while a group of youngsters practising on the song "Jinke aage Ji, jinke peeche ji, jinke aage peeche ji ji,...." for the sangeet function, with the song playing at full blast on a 10,000watt player.

There would certainly be a temple close by with either the aarti playing or a group of middle aged to aged ladies singing bhajans on a microphone, with the assumption that the louder they sing, the better God will fulfil their worldly desires. And God alone save you if either the Ganesh Puja or the Durga Puja is round the corner.

Be ready to lose sleep for atleast 7-8 days while the jobless dwellers of the so called society busy themselves in dancing, dining and playing Tambola (gambling in the name of God) through the night, all ofcourse accompanied by very-very loud music.

Another very common form of noise is adults, both men and women, fighting at the top of their voices. It could be for water, for maintenance money, for maids, for the post of the society administrator, for throwing garbage near each other's houses, or any thing else that I am not even able to think of.

2. The next important aspect of any slum is the garbage. Mango and banana peels, biscuit wrappers, empty haldiram's mixture packets, disposable cups and glasses, cat, cow and buffalo shit, beer bottles, rice and dal thrown from the fourth or the fifth floor balcony, torn underwears, and most importantly the paan juice at every possible corner and walls.

Yeah, I must mention that dabur lal dant manjan's red juice and the colgate tooth paste's white froth are also patch worked on the area just below the first floor houses' balconies.

3. The stink will not be missed. Though it will take you sometime to realise its presence as you will be totally overtaken by the noise and the garbage initially. Urine, animal shit, rotten food, stink from the nearest Municipal Corporations garbage collection area (which seems to be located almost every one meter in a slum) are all common. And yes, the smell of alchohol is pretty common too.

A few other salient features, which must be mentioned, though may not have meat enough to write a paragraph about are:
4. Lack of fresh air and sunlight in houses.
5. You can see your neighbour beating his wife at night from the kitchen balcony and hear another neighbour abusing his wife from your own bedroom.
6. Mosquitoes.
7. Kids running around without footwear (everywhere....not only at home).
8. Highly decked up ladies in artificial jewellery for even festivals of lesser significance.
9. Many dwellers may own high end cars like honda cities and ford ikons, but would still throw garbage from their balconies and would still abuse their wives at the top of their voices.
10. And last but not the least, everyone, almost everyone of them, love their share of free food at temples, weddings and Ganesh Pujas.

Understanding Interest Rate Futures

Co-author: Satish Kumar

(Published in the Hindu BusinessLine on 26th October, 2009)

The Securities and Exchange Board of India (SEBI) and the Government had approved the launch of Interest Rate Futures (IRFs) in December 2008. Subsequently, on August 31, 2009, the National Stock Exchange of India (NSE) launched the 10 Year Government Bond IRFs.

IRFs, which are extremely popular derivative contracts around the world accounting for more than 70 per cent of the total derivatives trading, were introduced in India for the first time in 2003. However, they were soon suspended due to illiquidity and poor price discovery. Another attempt has been made by SEBI to launch them, albeit with greater preparations this time.

IRFs are instrumental in facilitating the management of interest rate risk faced by organisations and individuals while investing in floating rate debt instruments. Hence this move is being viewed as a step towards boosting the country’s debt markets. The market participants are also welcoming this move as IRFs will not only provide more depth to the market; it will also act as another instrument for investment.

IRFs are derivative contracts on a fixed income security, namely, bonds. The price of the bond changes with changes in interest rates (yield), both being inversely related.

This causes a number of organisations to incur capital losses when the interest rates drop. Investors in the bond market can now hedge against this loss if they anticipate that the interest rates might fall.

Contract specifications

Underlying: 10 Year Government Bonds with notion coupon rate of 7 per cent, semi-annual compounding;

Minimum contract size: Rs 2 lakh;

Minimum maturity period: 12 months;

Expiry and settlement: March, June, September and December.

Let’s say a trader ABC, buys 5,000 units of bonds with a face value of Rs 100, coupon rate 7 per cent, semi-annual compounding, and the yield to maturity (YTM) of the bond being 6.5 per cent. The price of this bond in the market is Rs 103.63 (calculated using discounted cash flow method). Hence, the investment for the trader will be Rs 103.63 x 5,000 units = Rs 5,18,150.

The trader would like to sell off his investment after one year. However, he is worried that the central bank might raise the interest rates by 100 basis points (1 per cent) in the coming year. If this happens, the bond will trade at around Rs 96.77 in one year’s time. This will result in the value of his portfolio going down by Rs 34,300 [(103.63-96.77)*5000].

What the trader can do is hedge for this loss using IRFs. He can go short on equivalent value of IRF contracts now and then close his position after one year when the bond prices go down.

Other tools

Other hedging tools such as interest rate swaps or forward rate agreements were available to the investors in India since long. However, they suffered from the usual problems associated with over-the-counter contracts, like illiquidity, high transaction costs, third party risks, etc.

Now, with IRFs, investors have access to a more liquid contract with almost negligible third-party risk as the clearing house of the NSE will act as the counter party to all the trades.

Most of the institutional investors, such as insurance companies, pension and provident funds, mutual funds and banks will benefit immensely from these contracts as they hold huge amounts of fixed income securities in their portfolios, either to fulfil statutory requirements or to have a desired level of risk.

There are two more instruments which have been approved but not yet introduced. They are 91-day Treasury Bill futures and short-term interest rate futures based on an index of actual call money market rates. Once these products are also introduced, the debt markets in India would have truly taken a leap forward. It would attract speculators too, making price discovery better and the debt market more complete and liquid.

(The authors are faculty member and doctoral student, respectively, at IBS Hyderabad.)

Charminar

The first time I visited Charminar during Eid was in 2009. Glittering shirts, glittering trousers, glittering bangles, glittering shoes, glittering bags, glittering sarees, glittering kurtas, glittering showpieces, were all on sale on the eve of Eid-ul-Fitr.

With odour as varied as from Mirchi Bajji to coconut oil, from axe deodorant to vanilla wafers, from coffee to itr, from leather to new cotton clothes, the nose was working overtime.

Everything under the sun was being bought and sold, with vendors vying in the most unique ways to attract attention of the customers. The most innovative slogan that I heard was, “Maalik mar gaya, rate gir gaya”.

There were heads all around. We stood at one end of Charminar and were pushed all the way to it (about one kilometer) by the crowd. We went and stood on the other end, and were pushed back to where our bike was parked.

At eleven in the night, people were eating chaat, dosas, haleem, mirchi bajji, paneer and chicken tikka and drinking irani chai and chaach (buttermilk). White churidar, white kurta, black burkhas with veils, dominated the crowds.

What Brindavan is to Holi, Charminar is to Id

It is fascinating to visit a place during a festival that is popularly celebrated there. What Brindavan is to Holi, Ahmedabad is to Navratri, Durga Puja is to Kolkata, Charminar is to Eid. A truly unique experience. Must experience for all.

A futures contract on real-estate?

Date:01/02/2009 http://www.thehindubusinessline.com/bline/iw/2009/02/01/stories/2009020150471400.htm
If you are wondering why such trading hasn’t taken off in India, it is because these transactions need a lot of ground work to be put in place first.
“Why don’t we have a futures contract on real-estate to hedge the risk of land prices going down?” asked Rahul, a quiet but sharp student. Professor Nicky was taken aback by his question. Where most of the students in her class had difficulty understanding the basic concepts of hedging, this young boy was asking about an instrument which was, well, not so simple, to say the least.

Professor Nicky turned the question to the class to test how much the class knew. And she was in for a pleasant surprise. There were a few hands in the air.

Rachna: “It will be difficult to introduce real-estate futures because the valuation of the underlying product would be difficult. The real-estate market in India is highly fragmented. The prices of land differ widely based on factors such as location and usability, that is commercial, industrial, residential or agricultural”
Praveen added: “Besides, such a market would be very illiquid in India as only prime commercial and residential properties would probably be traded.”
Index of prices
“But, what is the problem here?” interposed Rajshree. “Can’t we create an index of real-estate prices? Just like we have stock indices? We can club the properties belonging to a particular city according to property types”.

Professor Nicky saw a few perplexed looking faces and decided to intervene even though she was happy with the way the discussion was proceeding. She took over from where Rajshree had left.
“See, just like we have an index for FMCG companies or IT companies or banks, similarly, we can create an index of real-estate Prices. Of course these indices will be city or region-wise indices. We would need to determine a base year”.
“Since it would be very tiresome to include all residential property transactions in the index, we take transactions that are above a minimum amount of, let’s say, Rs 25 lakh.

Now we can take a weighted average of all the transactions on a weekly or a fortnightly or monthly basis to find the changes in the index.
“However, the index may not give a true and fair picture as the recorded value of these transactions with the government is generally very low to save taxes. But then, it will still be better than having nothing. And slowly, as we move ahead and learn, the issues of heterogeneity and pricing will be sorted out”.
“Ah! If I recall correctly, Chicago Mercantile Exchange and Chicago Board of Trade have such futures traded on such contracts for cities such as New York and Los Angeles. In fact, they also have futures contracts on Real Estate Investment Trusts” exclaimed Richa.

“The students have really started reading,” thought Professor Nicky. “With the job scenario being bleak, many students have become serious and are trying to read more so that they can have an edge over their batch mates in an interview”!

Benefits of futures
“Yes, both the US and the UK have real-estate futures traded on their commodity exchanges for most of the major cities in the country. But can somebody tell me what the benefits of real-estate futures are?” asked Nicky.

Before Nicky could point towards a raised hand, Rohit rattled off, “Hedging for investors and builders, diversification, price discovery, increased information availability and flow, investment tool…”.

“Okay…okay…enough…so all of you are aware of the benefits of real-estate futures. But who has heard of the London Fox?” Thankfully no hands went up this time. Nicky was almost beginning to feel that she was not required in the classroom at all as the students had answers to all her questions.

Keeping them at bay
“London Futures and Options Exchange (FOX) started trading in four property futures contracts in May 1991 and had to suspend trading in October 1991. The reasons were mainly that these contracts were not economically viable. Arbitrage was not possible as short-selling is not allowed in the underlying spot market, which is true in India also.

“Also, the housing indices for various cities would be highly dependent on each other, albeit with lagged effect, due to the cascading effect in the real-estate markets. The transaction costs were also huge, which kept the investors and hedgers at bay.
“Hence, before introducing these futures, the government will have to do a lot of ground work to ensure that they work efficiently and provide the desired benefits to investors and hedgers”.
The class looked satisfied. Everyone had contributed something and everyone had learnt something new. Nicky looked proudly at her students and called it a day.

(Praveen, Rachna, Rahul, Rajshree, Richa and Rohit are students of IBS Hyderabad, class of 2009. Nupur is an Assistant Professor of Finance at IBS Hyderabad.)

Grasping the oil price, inflation linkage

Hindu Businessline-Racy Cases, 28.09.08 , Co-author: Arindam Mahato, IBS Hyd, Class of 2009

“Are the economic principles of demand and supply still valid?” asked a friend. We are at a loss for words for we are staunch supporter of economics. He continues, “I am scared to buy a car, for fear of oil prices touching the roof. Obviously the demand-supply position of oil has not changed drastically in the past one year, but the oil prices have more than doubled in one year and about quadrupled in the past five years.

 Now once again they are on the way down, and are now at around $100 per barrel! What’s the reason? Has the entire world economy become the playground of speculators? Are the prices purely driven by speculation?"

He was angry. Angry at everything around him. Angry at the policymakers for letting it all happen. Angry at the helplessness of the common man. We had no answers for all these questions. We too keep wondering about disillusionment cast by the entire financial and economic system around the world. However, his outburst did result in us taking a closer look at the oil prices.

Oil price drivers
A few macroeconomic factors which are said to be responsible for driving world crude oil prices are inflation, exchange rates, gold prices and OPEC’s decision on supply. These have an impact on oil prices either directly or indirectly.

Plotting the last five years’ data for all four of them along with the crude oil prices, we notice that gold and crude oil prices seem to have a very high correlation (0.9166). Oil and gold have been priced in US dollars since 1975.

Up to 1971 the dollar could be converted into gold by central banks. The price of gold was fixed at $35 an ounce and oil was steady at $3 a barrel. When the convertibility was removed, some of the oil producing countries converted the dollars into gold (this means that the demand for dollar went down and demand for gold went up). This had an impact on both oil and gold prices. Even today, an increase in the price of oil results in an increase in the price of gold and a decline in dollar value.

The euro-dollar exchange rates also seem to have a very high correlation with oil prices (0.8847). This could be due to the following: first, oil exporters have some price setting capacity; second, oil exporters receive a substantial share of their imports from Europe, particularly from euro area countries; third, oil invoicing takes place in US dollars; and, fourth, the US is itself a major importer of oil.

The OPEC supply has a much lower correlation of 0.7265. The supply of oil has remained more or less stable during the past five years. However, we can assume that the demand has been increasing due to the increasing appetite of emerging countries such as China and India. Also, oil is a finite resource and this has been recognised long back.

Depleting stock

According to a study, global oil resources are depleting at an annual rate of 6 per cent while demand is growing at an annual rate of 2 per cent. Thus, scarcity premium will continue to rise over time. This justifies the increase in prices. But what it does not justify is the sharp price rises and falls.

An increase in oil price results in inflation, which affects oil-importing countries. It also affects the cost of the finished products and prices in the economy. According to a research done by LeBlanc and Chinn of the University of California, Santa Cruz, oil price increases of as much as 10 percentage points will lead to direct inflationary increases of 0.1-0.8 percentage points in the US and the EU.

The correlation between world inflation and oil prices are the lowest amongst the four variables that we have considered (0.6879).

After doing this analysis, we went back to our friend to explain our findings. The response we got was “this is all very good and sounds logical too. But how does this have an impact on the common man? When the oil was $142 per barrel, I was paying Rs 56.60 per litre of petrol. Today, oil is around $100 a barrel and I am still paying around Rs 56 for a litre of petrol.

Unanswered questions
“The entire media quoted learned analysts and economists saying that inflation is going up because of oil prices. Now oil prices have fallen drastically but inflation has not come down. Do you have an answer for that?”

No we don’t. Now, with financial sector biggies such as Lehman Brothers and AIG collapsing, the general public is perplexed about the sanctity of the financial and economic systems, the acumen of analysts who slash the credit ratings of companies only after they actually collapses, and of the regulators who wake up only when such crises actually arise.

Currency Futures are here!

Hindu Businessline, 1st September 2008, Co-author-Zohra Zabeen
Currency futures are derivative instruments that allow investors and companies to hedge against exchange rate volatility.

Ravini is in a gloomy mood. As usual, she feels let down by the management education system of which she is a part — as a student, that is. She has absolutely no clue about the recently launched currency futures on the NSE (National Stock Exchange). In the last few days, she was haunted by currency derivatives even in her sleep.

On her way to the library, Ravini tries to put together all that she had learnt about futures, and as luck would have it, she sees Prof. Nicky walking out of the library. The only link between Nicky and Ravini was that they happened to live in the same locality some ten years back, and now, Ravini was a student at the same B-School at which Nicky was a Professor of Finance. This connection in an Indian setting means, Ravini considers it her right to call on Nicky anytime, anywhere and for anything.

Professor Nicky smiles knowingly as she looks at Ravini who has a perpetual question mark on her face. Nicky wastes no time in pleasantries, before asking, “So what’s bothering you today?”
Ravini: Hello Professor! I was wondering if you had some time to discuss currency futures.
Nicky: Ah! Indeed…I should have guessed. What do you already know about it?
Ravini: As the name suggests, it must be a futures contract, with currencies as the underlying asset. Beyond that I know nothing!

Nicky: Yes. You are right. These contracts were first created at the Chicago Mercantile Exchange in 1972 to hedge the exchange rate risks faced by businesses. After the collapse of the Bretton Woods Agreement, most of the countries shifted to a floating exchange rate regime, making exchange rates volatile.
So exchange rates, which were not something that needed to be managed earlier, now became a matter of concern for many exporters and another avenue to bet on, for speculators. Last week, on August 29, they were launched for trading at the NSE as well.

Ravini: So, currency futures are derivative instruments that allow investors and companies to hedge against exchange rate volatility?
Nicky: Yes, it allows exchange of one currency with another at a specified date in future at a prefixed price. Currency futures work the same way as futures in stocks.

Ravini: We already had Over the Counter currency forwards amounting to a huge daily turnover of $34billion in India, right? Then why do we need currency futures?

Nicky: The purpose of both is to protect the investors or companies from unfavourable movements in exchange rates. But the difference lies in the contract specifications. Forwards are customisable in terms of the amount and time for which the hedge is required. On the other hand, futures are standardised as per the specifications of the exchange.

Ravini: But then wouldn’t everyone want a customised contract?
Nicky: No. Exchange-traded futures (ETFs) would be preferred by many as the default risks would be limited due to the daily mark-to-market settlement and the involvement of National Securities Clearing Corporation (NSCCL) as the legal counterparty to all the trades that are executed at the NSE. Also, while exchange traded currency futures would be very liquid in nature, forwards are not liquid, they cannot be bought and sold as and when desired.

Also, in the case of forwards, trading takes place only between large players, typically between banks and corporations or between banks themselves. This causes lack of transparency in the pricing of the products.

Ravini: Oh! This means investors, fund managers, and companies can now hedge currency risk without the fear of default and illiquidity risks and with better price discovery mechanism.

Nicky: Absolutely. The step taken forward by the RBI and SEBI (Securities and Exchange Board of India) to introduce currency futures in India is indeed laudable and bears utmost importance keeping in mind current macroeconomic conditions. Fear of forex losses are haunting Indian corporates and this initiative is expected to bring some respite.

Currency futures offer several advantages to companies with international operations, fund managers, individuals, exporters, importers, hedge funds, non-banking institutions and speculators alike.
From the corporate perspective, currency risk hedging has assumed greater importance in the wake of excess volatility in the foreign exchange market, which has impacted the export performance and balance-sheet of the companies.

Many reputed companies have reported huge foreign exchange losses in the quarter ended June 30, 2008.
Moreover, in the current scenario where Indian companies are acquiring or buying foreign companies and seeking loans and funds abroad, the risk of exposure to various currencies have increased all the more.
From the investor’s point of view, a well-balanced portfolio through diversification and low systematic risk is beneficial. According to a few empirical studies price fluctuations in currency futures have very low correlations with price movements in stock market values and interest rates. Hence, this low correlation can reduce portfolio risk when equities and bonds are in depressed state.
Ravini: I read that RBI’s working group has suggested the contract size of $1000 with a maximum maturity of 12 months only for these contracts. Is there any specific reason for doing so?
Nicky: Yes, a small-sized contract (in value) would encourage more participants with even small currency exposures to take advantage of these contracts.
Ravini: If the currency futures have so many benefits, why are the FIIs and NRIs being barred from entering the market?

Nicky: As of now, there are many apprehensions regarding the success of currency futures launch. Hence, RBI and SEBI are being cautious in order to reduce the fear of speculation and volatility. However, this is a big step by them and must be applauded.
I am sure this is the first step towards creating a full fledged foreign exchange derivative market in India and would take the country closer to full capital account convertibility. Now, if you excuse me please, I must rush for a class.
Ravini: Sure professor. Thanks you very much and I hope to see you soon if I have further queries.

Happy and contented with the answers of Prof. Nicky, Ravini takes a U-turn to the canteen to show off her newly acquired gyan to her friends!
(http://Racycases.blogspot.com)

Futures’ cool, but options’ smarter

DNA, 15th August 2008
The derivative tool can be used by investors to good effect

Kishorilal switches on the telly a few minutes before the programme on investment strategies is to begin. In the last episode, he had watched Nicky, a professor in finance at a renowned business school explain how futures could be used as an investment tool. Today, she would be dealing with options.They are still playing advertisements, but Kishorilal desists from switching channels for fear he would miss out on parts of the programme. He even catches himself humming the familiar refrain of a paint company: “Jab ghar ki raunak badhani ho, deewaron ko jab sajaana ho…” If only he could own his dream bungalow... May be Nicky’s tips would help him realise that.He doesn’t have to wait long. The smiling professor soon appears and runs the viewers through the basics of option contracts, explaining how options allow the buyer more freedom than futures contracts do.Options are contracts that give one the right to buy (call option) or sell (put option) a stock at a predetermined price (exercise price) sometime in the future, she says. This right comes at a price, known as the premium.In a call option, if the market price of the asset is lower than the exercise price on the expiry date, the buyer of the call option will simply let the contract lapse. He is not obliged to buy the asset from the seller. Whereas, if the price is higher, the buyer will decide to exercise the option and the seller must deliver the asset. Hence, in this case, the buyer of a call option has limited his losses, but can also take advantage of unlimited gains if the price of the asset falls.A put option, on the other hand, gives the buyer of the contract the option to sell an asset at a predetermined price in the future. Just as in the case of call options, the buyer of the put option will simply let the contract lapse if the market price of the asset is higher than the exercise price on the expiry date.So far so good, thinks Kishorilal. But, how does one actually make money using these contracts?Nicky seems to be reading his mind. She starts explaining how various combinations of option contracts (known as strategies) could be used in different circumstances.“For example, if you know that the share price is going to move substantially, but are not sure in which direction, up or down, you can enter into a ‘straddle’,” she says.Now what’s a straddle? Well, it involves a call and a put option with the same exercise price and same expiry date. So, if an investor believes the price of Reliance shares will move substantially in the coming days, he can buy call options and at the same time buy put options which expire on the same date. The exercise price for both the options must be the same.From the investor’s point of view, the maximum loss in this case is the premium paid for obtaining the options. But, the maximum profit is unlimited.Kishorilal finds himself nodding. Certainly, the maximum loss will be the premium paid to obtain the call and put options in the event that both are not exercised. But how can the profit potential be unlimited?Say the exercise price of Reliance call and put options is Rs 2,160, Nicky explains. Now, upon expiration, if the stock price of Reliance goes up to Rs 3,000, the investor can exercise the call option, which gives him the right to buy the shares at Rs 2,160. Then, he can sell those shares in the market for Rs 3,000, making a profit of Rs 840 per share. Higher the price of Reliance shares, higher will be the gain from exercising the call option. Also, in a scenario where the price of the shares rises, the put options expire unused.On the other hand, if the price of Reliance falls to say Rs 1,600, the investor can exercise his put option, which gives him the right to sell the shares for Rs 2,160. Thus, he buys the shares from the market at Rs 1,600 and sells them for Rs 2,160, making a profit of Rs 560 per share. Lower the price of Reliance shares, higher will be the gain from exercising the put option. Also, in a scenario where the price of the shares falls, the call options expire unused. In order to calculate the net profit, the premium paid for buying the options must be deducted from the profits. Let’s assume that the premium paid to buy the call option was Rs 65 and the put option was Rs 100. Even after deducting the total premium of Rs 165, the investment in a straddle turns out to be very profitable.Nicky closes the session with a quote from Walter D Hopps: “Derivatives are nothing more than a tool. And just as a saw can build your house, it can cut off your arm if it isn’t used properly.”“The statutory disclosure,” thinks Kishorilal, but agrees that it can cut both ways. He is glad to have sat through the session, for now he knows he can invest in derivatives and get higher returns while keeping his maximum losses under control. He decides to study a few stocks closely for sometime before taking the plunge. His dream house couldn’t be very far away.

For the equity riches, try derivatives

DNA, 9th August 2008
Ek bangla bane nyara… ek bangla bane nyara…

Listening to Saigal sing his favourite song on the radio transports Kishorilal to his long-cherished vision of this huge house, with grills of silver, etc, where he lives happily with his entire family. Alas, he is nowhere close to realising this dream yet.Having retired last year, Kishorilal gets a pension of Rs 15,000 per month. During his working life, while he was never in an uncomfortable position financially, he could not chase his own dreams in the race to fulfill the needs of his family.
 And today, he just isn’t earning enough to realise any dream.With an income of Rs 15,000 per month, he is left with only about Rs 6,000 by the end of the month. The bank assures him that if he opens a recurring account with them, depositing Rs 6,000 per month, he will have Rs 12 lakh in 10 years. That translates into a return of approximately 9% per year, Kishorilal calculates. “That’s far too low a return and the Rs 12 lakh he gets at the end of 10 years won’t be enough for the bungalow of my dreams.”
The other alternative is to invest in the stock market. His neighbour Ravi recently made a lot of money by buying the shares of Reliance at Rs 1,960 apiece in September last year and selling them at around Rs 3,000 per share in January this year, getting over 100% annualised returns.However, Kishorilal feels the market is too volatile.

Besides, it isn’t exactly booming right now. He also remembers this former colleague who was forced to commit suicide after losing lakhs in the stock market in 1994. Kishorilal turns on the TV and switches channels nonchalantly. Images blur in front of his eyes, but suddenly, a few words catch his attention. A young lady (the banner at the bottom of the screen identifies her as Nicky, professor in finance at a renowned business school) is talking about making big bucks with small investments on CNBC. Take to derivatives trading, she says.Kishorilal always thought these contracts were for the likes of Warren Buffett and J P Morgan.

 But, Nicky says anyone can invest in derivatives. How come?Nicky is giving an example. To cash in on the rising share prices, one can invest in stocks that he thinks are going to rise in value in the coming days. However, investing in stocks can be a very expensive affair. Instead, one can buy the futures of that stock. Let’s say one now invests in Reliance futures, which expire on September 25 (last Thursday of the month). Say the price of one Reliance futures is Rs 2,300 currently.A good point about futures is that one only needs to pay a small percentage of the total contract value as margin initially. Let us say that the initial margin that the investor needs to pay is approximately 10%.

Each contract has a lot size; for Reliance, the lot size is 75. Thus, the initial investment is only 10% of the value of contract (which is 75 times Rs 2,300 = Rs 1,72,500). This equals an investment of only Rs 17,250 per contract. Kishorilal’s face lights up. His savings last year totalled more than Rs 70,000.

Going by Nicky’s calculations, he could invest in 4 Reliance futures contracts, which would cost him only Rs 69,000.But what will happen on September 25, when the contract expires? Nicky goes on to explain that upon expiry, the investor will receive his initial investment and the profit or loss on the futures contract.

Suppose the shares of Reliance are trading at Rs 3,000 at that time. The gain will be (Rs 3,000-Rs 2,300)*75, i.e. Rs 52,500 per contract, or Rs 2,10,000 for four contracts. This is a gain of 304% in just two months.Kishorilal runs some mental calculation and concludes that if he keeps reinvesting his profits and the initial investment after every three months, he will have enough money to buy his dream house in just two years.This is too good to be true, he thinks. There has to be a catch.

There is, he remembers from experience. Haven’t experts always advised investors to be careful in judging where the stock prices are headed? Imagine Ravi’s plight had the prices of Reliance shares had fallen instead of rising.Ben Golub’s famous words come to mind, “Risk management is akin to a dialysis machine. If it doesn’t work, you might have a noble obituary, but you’re dead.” Nicky’s not finished yet, though. According to her, if you are convinced that the share price of Reliance will go up in the next three months, you must take advantage of the Reliance futures.

 However, if there is any chance of the share prices falling, a different strategy may be adopted.Kishorilal sees a glimmer of hope. He switches off the TV and puts on the radio. Luckily for him, the music isn’t over yet.

Use 'weather derivatives' to weather droughts

(Interview by D. Murali and Kumar Shankar Roy, Hindu Businessline)

Chennai: With drought looming large over 14 meteorological sub-divisions, spare a thought for the planted crops that are in grave danger. For the farmers in Maharashtra, Andhra Pradesh, Karnataka and Kerala this monsoon has brought everything except the much-needed moisture. "Come rainy season and nearly 59 per cent of the Indian population, the people dependent on agriculture, keep their fingers crossed. Some pray to the rain God to ensure that it does not pour so hard that their crops get destroyed. On the other hand, in some villages, the farmers tie two frogs to a pole and get them married, a superstition which is supposed to bring good rainfall," quips Dr Nupur Pavan Bang, Faculty Member at ICFAI Business School (Hyderabad).

Superstitions apart, the seriousness of weather cannot be over-emphasized. "When livelihoods are dependent on rainfall, it is only fair that people will go to any extent to make sure that their farms get adequate amounts of rains...the farmers and various other businesses in the US have been using the weather derivatives since 1997, to mitigate risks due to adverse weather conditions," Dr Bang told Business Line. Weather derivatives, what are those? These derivative contracts are being used successfully by farmers, theme parks, ski resorts, ice-cream manufacturers, energy and utilities companies etc. since over a decade now. Read the short Q&A on 'weather derivatives' with Dr Bang done over the email to gain new insights.

Does India's size often become a disadvantage?
India, as a country, faces great variations in weather conditions due to its diverse geographical structure. While some places are hit by flood, some other by drought, rising temperatures are scaling new peaks and chilling winters are breaking old records. Such diversity in weather conditions affects the business processes of many industries directly or indirectly. The aviation industry takes the toll of fog in northern India during winters; floods in many parts leave their impact not only on agriculture but also on the tourism industry.

Tell us about these weather derivatives.
Weather derivatives are unique in many ways. The primary being, there is no physical underlying asset. The underlying asset is the weather, that is, the temperature measured in degrees Celsius or Fahrenheit or rainfall measured in centimeters. On the Chicago Mercantile Exchange, the values of these contracts are calculated based on a weather index. The index can represent either a Heating Degree Day (HDD) or a Cooling Degree Day (CDD). A HDD is the difference between a baseline temperature and the average temperature for a day in winters. A CDD is the difference between the average temperature for a day and a baseline temperature in summers. The baseline temperature is fixed; it is 65 degrees Fahrenheit in the US and 18 degrees Celsius in Europe.

From where will the derivatives derive their value?
The value of the contract would be some multiple of the HDD or the CDD. The contract can be valued on a daily basis, or weekly, or fortnightly or monthly or for a season; depending on the contract specifications. In 2005, NCDEX launched a rain day index for the Mumbai city for informational purposes only.

Can you explain the utility of weather derivatives with an example?
Let's consider a farmer growing paddy in a village in Andhra Pradesh. He is worried because of the expectations of unusually low rainfall in the state this year. He usually produces 50 quintals of paddy in his farm. But this year, he thinks the production will drop to 40 quintals. The Minimum Support Price for paddy is Rs770/quintal. This means that the farmer fears losing Rs 7,700 this season due to poor rainfall.

If the farmer had access to weather derivatives, he could have bought or sold (depending on the future outlook for rainfall) rain day futures contracts today and entered into an equal but opposite contract at a later date, making a profit on the transaction, thus offsetting the losses due to low volumes produced.

What are the other uses of these weather derivatives?
Apart from applying weather derivative as a measure of hedging risk against adverse weather conditions it can also be used as the mode of trading in derivatives. The most advantageous factor of weather derivatives is the fact that they can't be manipulated by any means like insider trading as the raining patterns are natural and beyond the scope of humans.

Are there challenges to a widespread adoption of this type of financial instrument?
The key challenge is to educate the people about such contracts and their usage. The knowledge of derivatives in itself is limited to certain segments of the society, leave alone the weather derivatives. In spite of the challenges, it is time the Government speeded up the process of launching weather derivatives in India too.

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