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Is Forex trading legal in India

June 1, 2022

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This article is written by Michael Shriney from the Sathyabama Institute of Science and Technology. This article discusses whether forex trading is legal in India. The article discusses forex trading, its purpose, and its operating process. How does this forex trading work with strategies, and who can trade this forex trading. Finally, is it illegal in India to use a foreign forex trading platform and FAQs have also been discussed.

This article has been published by Sneha Mahawar.

Table of Contents

Introduction

India is a country with different cultures and a constantly increasing economy. In India, foreign exchange (forex) trading is a new platform with greater chances. Currency trading is not totally legal. Only currency exchange which comprises the Indian rupees is allowed to be traded (INR). The INR’s weakness against the US dollar is the main reason for this restriction (USD).

Forex is a decentralised form of foreign exchange or currency trading on the worldwide market. All currencies of different economies are bought and sold in forex trading. The currency market is the world’s largest and most liquid market. Forex trading is the act of buying and selling currencies both within and outside the country. This trading is carried out through an electronic network of banks, brokers, institutions, and individual traders, but banks and brokers mainly carry it out.

Traders in India who wish to buy USD have to buy it through the Central Bank of India, i.e., RBI. This article discusses all aspects of forex trading in India, including whether it is legal or not, under what circumstances it is illegal; how forex trading works and what its aims are; who operates this trading; and commonly asked questions. Let’s take a brief look at these headings separately in the article below.

Forex trading

Foreign exchange is a global market for the exchange of national currencies. Foreign exchange markets are the world’s largest securities market by nominal value, with trillions of dollars changing hands every day. Another way to engage in the currency market is through forwards and futures deals. Exchanging one currency for another at a local bank is a simple example of foreign exchange. It may also include currency trading on the foreign exchange market. For example, when a trader predicts that the central bank will ease or tighten monetary policy and that one currency will strengthen versus another, the other will fall in value. Currency trading pairs are formed, such as IND/USD, or Indian rupee versus US dollar; USD/CAD or US dollar versus Canadian dollar (CAD).

The forex market is open 24 hours a day, five days a week in major financial centers around the world, allowing traders to purchase and sell currencies at any time of day. It’s not nearly a one-stop-shop. In order to conduct forex transactions, an investor can choose from a number of various options. One can go through a variety of dealers or financial centers that employ a variety of electronic networks. Nowadays, trading currencies is made easy by a single mouse click, and accessibility is not an issue, meaning that anybody can do it. However, many investing businesses allow individuals to create accounts and exchange currencies.

Traders can trade forex on the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), and Metropolitan Stock Exchange (MSE) if they are Indian citizens. The Securities and Exchange Board of India (SEBI) was founded in 1992 to supervise and regulate currency trading in India. It is a self-governing body that safeguards forex security issuers, investors, and forex-related organisations. Forex trading must be licensed with SEBI to operate forex brokers and stock exchanges within India.

How does Forex trading operate

The foreign exchange market has two distinct trading communities. They are as follows:

Interbank forex market

The interbank forex market is a network of banks and institutions that exchange currencies with one another. These transactions are often large and make up the bulk of the global forex market volume. The currency desks at several trading banks transact continuously, ensuring that the currency exchange rate remains constant.

The retail forex market

A vast number of traders participate in the retail forex market. However, because the value per transaction is minimal, the trading volume is lower than the interbank market. The currencies can be bought and exchanged or sold here in a matter of seconds. Traders seek to benefit from currency exchange rates.

Forex terminologies

Every day, millions of individuals trade forex. Before beginning forex trading, traders should familiarize themselves with the following terms:

Pip: In a currency pair, the smallest unit of price fluctuation is known as a pip. Forex pairings are often listed to the fourth decimal point. For example, if USD/INR moves from 64.8050 to 64.8060, it is considered a 10 pip gain.
Lot size: the total amount of cash purchased or traded The normal lot size is 100,000 units. However, traders can trade smaller units as well.
Orders: An order allows the trader to carry out the transaction. For example, if a person wishes to purchase 100 USD/INR, he or she will place a buy order. Similarly, if someone wishes to sell 100 USD/INR, they will place a sell order. There are several kinds of orders available to assist traders to limit losses and enhance profits.
Calls: When a trader’s trading positions require more financing to be maintained, their online broker sends a call. To minimise more losses, they should regularly monitor the trader’s account for any calls they may have received.

Types of forex markets

Spot market

Trading in the spot market occurs at the point of transaction with immediate effect or in a short period of time. For most currencies, the spot market is two business days. Spot transactions might take up to six days to settle when there are many holidays such as Easter, Christmas, and Pongal. On the trading day, the price is set, but money is exchanged on the value date. Trading in the spot market may be quite risky. Technical trading, which focuses on direction and speed of movement, leads to short-term movement. Chartists are persons who concentrate on technical analysis.

Forward forex market

The transaction takes place at a future date or a set of dates based on a personalized contract between the parties to swap the currency at a specified exchange rate. Any deal that settles longer in the future than the spot is considered a forward trade. The forward price is made up of the spot rate plus or minus forward points, which indicate the difference in interest rates between the two currencies. The majority have a duration of less than a year, although longer durations are possible. The price is determined on the transaction day, just like in a spot market, but money is exchanged on the expiry date. A forward contract is personalized to the needs of the parties involved. They can be for any amount, and they can be settled on any day that isn’t a weekend or a holiday in one of the countries.

Future forex market

A futures contract is similar to a forward contract in that it settles later than a spot contract, but it is for standard size and settlement date, and it is traded on a commodities exchange. As the counterparty, the exchange market is involved. It’s also a contract to trade in the currency on a specific date and at a specific exchange rate. A futures contract is standardised, legally enforceable, and tradable on a stock exchange.

Foreign currency swap

A forward contract, in which two parties agree to pay each other in the future, is included in a foreign currency swap. However, before entering into a forward contract, the two parties exchange currencies at a spot rate. The swap occurs when the two parties’ currencies have the same value.

Purpose of forex trading

The goal of the forex market is to determine the currency value at which an international transaction will be calculated. This protects the party from a rapid fall in the value of the foreign currency. The unpredictability of the foreign currency market provides good ground for speculation. While hedging may appear to be an institutional strategy to handle exchange rate risks, retail traders stand to benefit the most from speculative foreign currency trading.

Operational details

Any forex exchange involves two currencies: the first stated currency is known as the base currency, and the second is known as the quote currency. If INR is the base currency and GBP is the quote currency, then INR/GBP trading at 0.0097 indicates that one Indian rupee (INR) is worth 0.0097 British Pound sterling (GBP). Exchange rates fluctuate according to demand-supply dynamics, but they are also influenced by central banks since they manage currency supply. The exchange rate of the domestic currency is also influenced by the country’s economic performance, current events, and market sentiment. There are currency pairs that can be branched into the following categories:

Major currency pairs: This pair is highly traded. Count to seven currencies that account for 80 percent of worldwide forex trade, such as the Euro/US dollar [EUR/ USD], the British Pound/ US dollar [GBP/ USD], US dollar/ Japanese Yen [USD/JPY], the British Pound/ Swiss franc [GBP/CHF];
Minor currency pairs: This pair is less frequently traded. Instead of the US dollar, they frequently match major currencies against one another such as the British Pound/ Japanese yen [GBP/JPY], Euro/ British Pound [EUR/GBP], Euro/ Swiss franc [EUR/CHF];
Exotic currency pairs: This pair is the main currency against one currency from a small or developing economy such as the British Pound/ Mexican peso [GBP/ MXN], Euro/ Czech koruna [EUR/CZK], US dollar/ Poland Zloty [USD/PLN]; and
Regional currency pairs: These are the pairs classified by region, such as the Australian dollar/ New Zealand dollar [AUD/NZD], Australian dollar/Singapore dollar [AUD/SGD], and Euro/ Norwegian krone [EUR/NOK] are all available to traders.

Indian currency market

Currency futures can be traded on the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), and the Multi Commodity Exchange (MCX) in India. The trader must create an account with the broker and trade between the hours of 9 a.m. and 5 p.m. The trades are cash paid and do not require any physical delivery. For this type of trading, the trader must meet the broker’s Know-Your-Customer (KYC) requirements. The trader must make a margin deposit, which is the amount that the broker maintains while the trader’s forex trade is open. They can begin trading after the broker has shared the trading account access credentials.

Risks involved

A country’s central bank, i.e., the RBI in the case of India, makes decisions based on its domestic monetary policy. If a trader uses that country’s currency, the exchange rate will fluctuate unexpectedly. Currency trading is regarded as a high-risk activity. The greatest risk is a depreciating currency. If not chosen and checked timely and regularly, speculators may suffer significant losses. Non-payment of an outstanding currency position carries a credit risk as well. The risk of losing more than the margin amount is referred to as leverage risk. The trader’s loss might be increased if he or she uses this leverage amount aggressively. A trader’s interest rate risk might be increased by other variables such as instability and inconsistency in forward contract amount in the transaction.

Choosing the right broker

When anyone trades forex using a broker, they must ensure that the broker is registered with the exchange and has a good reputation. The broker’s leverage and margin options are also significant. The broker’s fees should be chosen by the trader. The trader must choose if the commission is set or whether the broker intends to profit by widening the spread between the bid and asking prices for the traded currency pair. The broker’s first deposit should not be excessively large, and the deposit and withdrawal methods should be simple. The broker should provide traders with the currency pairings that they wish to deal with.

Trading style

Different methods and styles are common among forex traders, such as the Daily Fibonacci Pivot Trade might be difficult to understand at first. Scalping is a basic strategy in which traders trade several times each day while holding a position in another period. Scalpers maintain track of significant news releases such as GDP, unemployment rate, and inflation, aiming to profit from them in one day. Longer positions are held in the positional approach to profit from large changes in the market. Whatever the trader’s trading style, they should keep a check on their leverage utilisation and focus attention on market movements to avoid or reduce forex losses.

Strategies for forex trading

Forex traders rely on some fundamental strategies to succeed in global markets. These forex trading methods are simple to learn but tough to master. Some of the most important forex trading strategies are as follows:

Scalping

Scalping is a forex trading strategy in which minimal profits are made through several trades. To obtain minimal margins, traders can arrange their entry and exit positions with modest fluctuations in the currencies. Scalping needs careful execution in order to make the most of its transactions. These are short-term trades that can last from one to sixty minutes. Being knowledgeable about currency patterns is essential for successful scalping.

Day trading

Day trading, as the name implies, is the act of opening and completing a deal on the same day. These transactions can take any time from a few minutes to a couple of hours. With this strategy, traders can avoid experiencing huge losses as a result of overnight market fluctuations. Day trading is a simple and straightforward way to start making money if the trader is new to forex trading. It can reduce traders’ risk while enhancing their chances of profit.

Swing trading

Swing trading is a strategy for trading foreign currencies over the course of a day or a week. This strategy provides the trader with sufficient time to deflect daily fluctuations in the value of currency pairs. With this medium-term forex trading strategy, traders may find a way to reduce the risk to stop losses along the way.

Position trading

Position trading is a trading strategy that entails keeping a trader’s trade positions open for an extended period of time. These transactions might last anywhere from a week to several months or even years. This method allows them to profit from large changes in the value of currency pairings without stressing about micro-changes in the market. With position trading, traders may establish their entry and exit positions for longer periods of time. Checking and monitoring current affairs and socioeconomic policies that impact the world at large is critical to making this form of trading a success. They can sign in to the trader’s account once or twice a week.

Range trading

Range trading is a strategy that involves trading currency pairs with predictable price fluctuations. This strategy identifies repeated patterns of lows and highs using historical performance data of currency pairs. Based on the financial data, the trader can establish a larger entry and exit position in order to capitalize on historical price trends. It is a safer option alternative to day trading due to the calculated risks involved.

Price action strategy

The price action strategy is one of the most regularly used forex trading strategies. It is fully dependent on the bulls and bears of price action in currency trading and is normally useful in all market circumstances. Rather than depending primarily on technical indicators, it is a trading approach that enables a trader to analyze the market and make subjective financial decisions based on previous and actual price swings.

Trend trading

In this type of strategy, traders must identify the fluctuation of the currency price, whether upward or downward, in order to choose their entry point. Online tools like as moving averages, relative strength indicators, and so on are also accessible to help traders with their analysis. It is a type of trading that attempts to seek profit by analysing an asset’s momentum in a specific direction.

Counter trend-trading

This strategy involves trading against the current trend in the hopes of generating small gains and is based on the predictions that the trend will revert. It is a type of swing trading in which the trader expects that a dominant trend will have reversals and seeks to benefit from them as the trend continues. It is often a medium-term strategy with positions held for many days to several weeks.

Breakout trading

In this strategy, a trader joins the market when it is breaking out of a previous trading range, i.e. a breakout. This method looks for levels or places where security has been unable to move beyond and waits for it to move beyond those levels. A breakout occurs when a price rises above one of these levels.

Carry trade

The focus of this strategy is on the carry trade, which has an interest rate differential between the two countries whose currencies are being exchanged. This entails selling the currency with a low-interest rate and buying the currency with a higher interest rate and is thus regarded as a very effective strategy if properly implemented. It is often focused on borrowing in a currency with a low-interest rate and exchanging the borrowed money into another currency.

It is a well-established fact that no Indian person, as guided by SEBI and supervised by the Reserve Bank of India (RBI) in order to limit risk, can engage in forex trading within Indian territory using any electronic or online forex trading platform under any circumstances. The RBI issued a Circular in 2013 prohibiting currency trading using electronic or online trading venues. Forex trading, on the other hand, is considered legal when done through certain foreign exchange trading platforms when the base currency is INR. The Indian government has limited trading for Indian citizens to only trade currency pairs that are benchmarked against the INR.

As an Indian citizen, as long as traders trade through any specified Indian Brokerage that gives access to Indian exchanges such as the NSE, BSE, and MCX-SX, and also allows access to currency derivatives, the transactions performed for the trade are totally legal. From the 10th of December 2015 onwards, the RBI permitted exchanges to provide cross-currency futures contacts and exchange-traded currency options in three new currency pairs: EUR-USD, GBP-USD, and USD-JPY. At this point, it should be remembered that under the Foreign Exchange Management Act (FEMA) of 1999, illegal forex trading in India can result in jail or a fine. However, it should be noted that there is no ban on NRIs doing foreign exchange trading in India.

Foreign forex trading platforms and their legal status in India

Anyone who has used social media may have come across advertisements for online Forex trading platforms. Many of them also advertise in Indian languages. The advertising discusses how to quickly trade in the forex market and make quick money. Many of these forex trading platforms are well-known all around the world. They are, however, prohibited in India. They carry out binary deals. It means that the trader will either receive a fixed amount or nothing at all. For example, if someone bets on the US dollar falling against the Indian rupee. If it does, the individual receives a fixed amount. If that individual loses, the money is kept by the platform. Binary trading is illegal in India and many other countries across the world.

Binaries are exchanged between the platform and the trader. There is no third party engaged. The exchange’s role is to offer a platform for trading between buyers and sellers. Many internet platforms provide users with a lot of leverage. The Foreign Exchange Management Act (FEMA) prohibits binary trading. According to the Reserve Bank of India’s Liberalised Remittance Scheme, an individual cannot utilise the money that is transferred overseas for speculative reasons or to provide margin money for trading. It encourages investments, but only on a delivery basis. Individuals in India can trade Forex on stock markets, but only with certain limitations.

For example, there are just four currency pairs available: US Dollars (USD), Euros (EUR), British Pounds (GBP), and Japanese Yen (JPY). Because of these restrictions, the forex market in India is smaller than in many other developed markets. By creating a trading account with a broker, an investor can trade the four pairs. There is also the possibility of falling victim to scammers portraying as an online currency platform. Initially, the trader wins minimal transactions. However, when the transaction amount rises, the individual begins to lose money. The platform will stop operating within a few months.

Steps to get started with Forex in India

A step-by-step guide to assist traders in getting started with forex trading:

Step 1: Get a digital device with fast internet connectivity

Forex trading can be done on a computer, laptop, tablet, or smartphone. The exchange rates of currency pairs listed on the stock exchange fluctuate a lot. Successful forex trading requires a personal gadget that can continuously track these fluctuations.

Step 2: Find an online forex broker

There are various online foreign exchange brokers. Examine each broker’s website to find one that allows traders to trade INR currency pairings. Check the bottom of every webpage for regulatory information. The broker cannot be trusted if the trader cannot get such information from the Securities Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), or other similar regulatory authorities.

Step 3: Sign-up for an account

On the forex broker’s website, a trader must create a new account. Some forex brokers require a minimum deposit in order to open a new account. These brokers also provide several types of accounts based on the financial goals of the trader. Choose the best option for that trader.

Step 4: Transfer funds to the trader’s account

After opening an account, the trader must transfer funds to begin trading forex. Depending on the broker chosen, the trader can select their native currency and finance their account using a variety of strategies. These financing options often include bank transfers, wire transfers, and debit cards.

Step 5: Download a forex trading platform

The trader must next download the forex trading platform on their computer or smartphone. Take the time to personalise the platform’s appearance and feel in order to maximise forex trading opportunities.

Step 6: Begin trader’s forex trading journey

Before beginning to trade forex, traders might also want to perform a few demos with virtual money. These demonstrations can assist traders in becoming familiar with the forex broker’s interface without risking excessive expenses. They can begin trading forex with real money once they have gained confidence in utilising the platform.

Conclusion

In India, forex trading has grown into a continuous market that is transacted on a daily basis. It is a global trading platform for exchanging national currencies. It is an over-the-counter market that determines worldwide currency exchange rates. In India, forex trading is legal. However, citizens are not allowed to trade on electronic or online currency trading platforms.

In comparison to other nations, India’s forex trading is unique in that most of the international currency trading is done electronically or online. Forex trading is a legitimate means of earning money. It is permissible to trade forex on Indian exchanges such as the BSE, NSE, and MCX-SX. In forex trading, India is the fourth-best and largest forex reserve country.

Frequently Asked Questions (FAQs)

Who regulates forex trading in India?

The SEBI is in charge of regulating forex, brokers and safeguarding investors.

What are the best online forex brokers in India?

There are several online forex brokers in India like Pepperstone, Forex.com, Etoro and so on.

Is forex trading profitable in India?

Because India is a very liquid market, the chance of making a profit is as small as those of losing money anywhere in the world. All the tricks of the trade must be learned with the proper skillset and control of the fundamentals.

Where can I trade forex in India?

Forex traders can lawfully trade on Indian exchanges such as BSE, NSE and MCX-SX.

Is forex trading just gambling?

Gambling is a game in which anyone may rely entirely on pure luck. Forex trading is not a form of gambling. It is a high-risk technique in which a trader attempts to profit by predicting market movement.

Which currency pairs can be traded in India?

The following currency pairs are available for trading in India:

Rupee-dollar,
Rupee-pound,
Rupee-yen,
Rupee-euro,
Euro-dollar,
Pound-dollar;
Yen-dollar.
What if I want to trade forex markets with international brokers?

The person is prohibited to trade the forex markets using international brokers.

What is the punishment for forex trading in India?

According to Section 13 of the FEMA Act, violating the Act can result in penalties as well as imprisonment. Under the section, the penalty can be up to five thousand rupees for each day the contravention continues.

Reference

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