Forex trading
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This article is written by Manya Dudeja, from University School of Law and Legal Studies, Guru Gobind Singh Indraprastha University. The article aims at laying down the law that is behind the trading of foreign currency in India and the penalties violation of it can attract. 


With the advent of globalisation, forex trading has become a new and important part of urban lives. These have become so inherent in part of our lives that we often do not even realise it. For example, if you are a person living in India and aspiring to buy imported chocolates from Britain, the only way you can do that is by using the British currency i.e Pound Sterling, you will have to exchange the Indian Rupee for a Pound Sterling and then buy the desired chocolates. Global inter-mixing has broken the barriers of world trade and people from one part of the world are trading with people from another part of the world. 

In India, forex trading is also called currency trading. It is basically a market where one currency is exchanged for another. Such a market is called the currency market. According to Indian law, forex trading is legal but within a regulated framework and through specific governing bodies. This regulation is applied in order to safeguard its people from possible losses. Through this article, we will explore the various legal dimensions that govern foreign exchange trading in India. 

Is forex trading legal in India

The legality of forex trading in India is a rather contentious question. It has been subjected to various restrictions and limitations. While forex trading is not illegal in India, it is legal to trade it only through the dealers of the Securities and Exchange Board of India (SEBI).

Forex trading can be divided into two types in order to understand its legality. They are:

  • Spot forex trading
  • Forex trading via derivative instruments

Spot forex trading refers to trading which involves physical and actual ownership of the currency with a person. On the other hand, derivative instruments include futures and options. It helps big corporations to hedge their currencies when dealing with businesses from other parts of the world. This kind of forex trading is not legal in India and has been banned by the Reserve Bank of India, which is the apex body regulating foreign exchange in India. It is responsible for taking all the key decisions and for the regulation of foreign exchange. 

Note: Non-Resident Indians (NRIs) are not prohibited to get involved in foreign exchange trading in India. 


Earlier, there used to be no such regulation in the market and trading foreign exchange had no restrictions. Then, after a few years, the foreign exchange reserves of the country fell. In order to address this, the Foreign Exchange Regulation Act, 1973 came into existence. FERA, however, could not be successful in restricting activities and because of this, the Rupee saw a downfall in the year 2013. The Foreign Exchange Regulation Act was repealed and replaced by the Central Government in order to keep up with the changing circumstances in the foreign exchange market. The new act which was formulated to suit the environment prevailing in the market was the Foreign Exchange Management Act, 1999. It was enacted from June 01, 2002. There was a change in India’s philosophical approach, from the approach of conserving foreign exchange we moved to a more liberal and practical approach of managing and regulating foreign exchange. The Reserve Bank of India has been active and has also laid down certain rules and regulations to govern foreign exchange trading in India.

Foreign Exchange Management Act, 1999

Aims of the Act

  • To facilitate and regulate external trade and payments.
  • Maintain order and to develop the foreign exchange market.

Authorities governing the enforcement of the Foreign Exchange Management Act (FEMA)

  • The Capital Markets Division, under the Department of Economic Affairs of the Ministry of Finance:

Machinery that is responsible for the different aspects of the Foreign Exchange Management Act (FEMA)

In order to investigate the provisions of the Foreign Exchange Management Act, the Enforcement Directorate or a body of officers along with the Directorate has been appointed by the Central government. Its duty is to prevent leakage of foreign exchange which might take place due to malpractices by some. The Directorate is responsible for the detection of such cases and also for their adjudication. 

  • Adjudicating Authority

This authority is responsible for issuing a notice to anybody who does something which goes against the Foreign Exchange Management Act, its rules and regulations and the rules set by the Reserve Bank of India.

  • Special Director (Appeals)

If a person is aggrieved by the order made by the Adjudicating Authority, he/she can appeal the same to the Special Director.

  • Appellate Tribunal

A person who is aggrieved by the order of the Adjudicating Authority or the Special Director can file for an appeal at the Appellate Tribunal.

  • Foreign Exchange Department of the RBI

It was earlier known as the Exchange Control Board. It regulates the Foreign Exchange Management Act 1999 and the transactions under the current account except a few listed by the Central government. It is not required to take permission from the RBI for the same. The banks which are authorised to deal with foreign exchange have extensive powers.

  • Department for Promotion of Industry and Internal Trade (DPIIT)

Regulation and Management of Foreign Exchange

Section 2(n) of the Foreign Exchange Management Act (FEMA) defines foreign exchange as including:

  • Deposits, credits and balances that are payable in foreign currency.
  • Drafts, travellers’ cheques, letters of credit or bills of exchange that are payable in foreign currency, expressed or drawn in Indian currency.
  • Drafts, travellers’ cheques, letters of credit or bills of exchange drawn by banks, institutions or persons outside India, but payable in Indian currency.

Prohibitions under FEMA

  • Under the Act, it is not allowed to deal with or transfer foreign exchange or foreign security to anyone who is not an authorised person.
  • It is prohibited to make any payment to or for the credit of any person resident outside India.
  • An Indian is not allowed to receive payment directly or by order of, on behalf of any resident person outside India.
  • An Indian is not allowed to enter into any such financial transaction in India in consideration of acquiring any asset outside India.

Surrender of foreign exchange

  • If foreign exchange is earned by any person who is not a resident of India and is not used for purposes that are permissible, such foreign exchange is to be surrendered within 60 days of such purchase or acquisition.
  • Though, if the foreign exchange is acquired for foreign travel, then the surrender has to be made:
  1. If the exchange is in currency and coins – to be surrendered within 90 days.
  2. If the exchange is in travellers’ cheque or acquired by a person who is resident in India – to be surrendered within 180 days.

Release of Exchange for travel which does not require approval from the RBI

  • Up to USD 10,000 or equivalent in a single financial year (1st April to 31st March) for one or more private visits outside India.

Exceptions to this rule: Nepal and Bhutan

  • For business visits, up to USD 25,000.
  • For a person moving out of India for education (annual), employment and in order to access medical treatment- up to USD 1,00,000.

Penalties on persons acting in contravention of the Act

  • Punishments and penalties with regard to forex trading in India are mentioned under Section 13 of the FEMA.
  • If any person goes against any rules, regulations and notifications provided in this Act or against any such condition subject to which an authorisation issued by the Reserve Bank of India, such a person would be liable to be punished with a penalty of up to three times the sum involved in such contravention in places where such amount is quantifiable.
  • In cases where the amount cannot be quantified, the sum can be up to Rs 2 lakh. 
  • In cases where the contravention continues, Rs 5,000 can be imposed for every day that it continues for. 
  • The adjudicating authority deciding on the case of violation of this Act or any rules there under, may if it finds suitable in addition to the penalties given above, decide to confiscate by the Central Government, the foreign exchange holdings if any of the person who has committed the violation. This can be brought back to India or retained outside India, depending on the instructions of the authorities involved.

Seven legal currency pairs

Trading of foreign currencies is authorised only if undertaken through these pairs. The first four pairs have been exempted by the Financial Exchange Management Act, 1999, which has been listed out by the Reserve Bank of India:

  • USDINR (US Dollar- Indian Rupee)
  • GBPINR (Pound Sterling- Indian Rupee)
  • EURINR (Euro- Indian Rupee)
  • JPYINR (Japanese Yen- Indian Rupee)

By the year 2015, the Reserve Bank of India eased its policies a bit and allowed a few i.e. three more cross currency pairs. These are as follows:

  • EURUSD (Euro- US Dollar)
  • GBPUSD (Pound Sterling- US Dollar)
  • USDJPY (US Dollar- Japanese Yen)

Legal Indian Exchanges

All currency trading can be carried out through National Stock Exchanges. The three main exchanges are as follows:

  • National Stock Exchange of India (NSE)
  • Bombay Stock Exchange (BSE)
  • Metropolitan Stock Exchange (MCX-SX)

The trade can be carried out through the Securities and Exchange Board of India (SEBI) approved brokers, like, Zerodha, Motilal Oswal, Upstox. These brokers would further link the traders with any of the three National Stock Exchanges. 

International brokers are not allowed

Offshore brokers that facilitate spot foreign exchange are outside the jurisdiction of India. They are not governed by SEBI and hence, a person of Indian nationality is not allowed to deal with them. Such a trade is illegal. 


Hence, under the Foreign Exchange Management Act, only authorised persons are equipped to deal with foreign exchange. Anyone willing to deal with or get into business outside India has to do so through an authorised person. Also, it is important that the person understands the Act and rules regulating foreign exchange in order to avoid any penalties that may arise since ignorance of the law is not an excuse.

The foreign exchange market is one of the largest and most actively traded markets in the world today. Its average daily trading is a volume of $ 5 trillion. However, its trade in India is not unlimited and is fairly restricted and regulated by the law of the land. Hence, anyone willing to trade in this market must be well- informed, aware and cautious of the law in order to avoid any contravention with the law. 


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