The global FX market presents innumerable opportunities to traders, both big and small. With the proliferation of internet technology in almost all countries of the world and the emergence of online platforms, FX trading has become more popular than ever. In India, the FX market is highly regulated, which has an impact on the type of trading environment Indian FX traders get. With growing awareness among Indian traders regarding the global forex market, there is an increasing number of enquiries into the existing legal framework concerning FX trading in India.
Traditionally the Indian FX market was very restricted. However, with the onset of economic liberalisation, the Indian FX market experienced substantial growth. In February 1992, started to make the Rupee convertible, and in March 1993, a single floating exchange rate in the market of FX in India was started. The Indian FX Market comprises of buyers, sellers, market mediators and the Monetary Authority of India. However, online brokers with their trading platforms are challenging this hierarchy, introducing newer ways for traders to access the market. This, however, makes it very important for traders to be clear about the FX trading regulations in India.
Who Regulates The FX Market In India?
In India, people tend to think of stock trading whenever the term “trading” comes up. This is largely due to several factors such as a basic lack of awareness among the public as well as the rigid rules regarding forex trading in the country. This has led many to believe that forex trading is illegal in India. This is not true, as an Indian can also access the global forex market and trade.
However, FX trading from inside the country becomes complicated because of the way existing rules are framed. It’s thus necessary for every trader to read and understand the rules associated with forex trading in India before embarking on trading.
- The Securities and Exchange Board of India (SEBI) is the main regulatory body for FX activity in the country, while the Reserve Bank of India (RBI) also has the authority to control the market. You can check out more information related to FX regulation on their official sites: https://www.sebi.gov.in/ and https://www.rbi.org.in/
- The Foreign Exchange Department of the RBI governs and regulates transactions having international financial implications.
- However, the RBI cannot stop anyone from drawing foreign currency for payments due to the depreciation of direct investments in the ordinary course of business.
About FX Rules in India
The Indian government first introduced the FX Regulation Act with a goal of conserving India’s FX resources. You can read all about this old law at https://en.wikipedia.org/wiki/Foreign_Exchange_Management_Act#Foreign_Exchange_Regulation_Act
- India’s FX control regime was governed by the FX Regulation Act, 1973 (FERA) until June 2000. Comprehensive amendments to FERA, especially concerning foreign investment and foreign trade had been undertaken to give effect to the ongoing process of economic liberalisations.
- India was facing a trade deficit, which was followed by a devaluation of the currency and an increase in the price of imported oil. FERA specified which FX transactions were permitted, including those between Indian residents and non-residents.
- FERA had objectives such as preventing the outflow of Indian currency, regulating regulate dealings in FX and securities, regulating the transaction indirectly affecting FX and regulating import and export of currency and bullion among other things.
- In the light of ongoing Economic liberalization and improving FX reserves position in the 90s, a new act, FEMA (FX Management Act) 1999 replaced the FERA.
- FEMA permits full liberty to a person staying in India to hold or transfer any foreign securities or immovable property situated outside India.
- FEMA is now in charge for allowing external trade and payment, promoting orderly maintenance of the FX market In India, regulating foreign capital in India and imbalance of payment among other things.
Rules set by SEBI
The SEBI and other regulatory bodies in the countries have introduced some stringent rules to control FX trading activity in the country. A lot of these rules have been relaxed over the years but they are still rigid compared to other countries.
- Indian traders are only allowed by law to trade certain currencies. The government has made a whole list of currencies unavailable for trading under the pretext that it will cause the INR to lose value.
- Under existing rules, traders based in India can only trade pairs that include the INR as the base currency. This includes JPY-INR, EUR-INR, GBP-INR and USD-INR.
- Three additional currency pairs are now allowed for trading: USD-JPY, GBP-USD and EUR-USD.
- SEBI only allows traders to trade with brokers that are under its regulations. However, a non-resident Indian does not fall under this rule.
- The rules clearly state that an Indian citizen cannot send INR outside the borders with the intention of FX trading. However, this means that you can trade with an international broker without sending money outside.
- When it comes to FX trading, an Indian citizen cannot receive funds in INR through the traditional SEBI or RBI allowed deposit methods.
- No person resident in India shall acquire, hold, own, possess or transfer any FX, foreign security or any immovable property situated outside India.
- Any person may sell or draw FX to or from an authorised person if such sale is a current account transaction(business). The added condition is that the Central Government may, in the public interest and in consultation with the Reserve Bank, impose such reasonable restrictions for current account transactions as may be prescribed.
SEBI vs other market regulators
International regulators play a major role in the global FX market, because of the fact that it’s a vast and volatile market with no single authority. Central regulatory bodies of different countries take it upon themselves to regulate their respective markets. Since FX trading usually involves selling one currency for buying another one, two countries are always involved. These two countries may or may not have the same level of regulatory compliance as each other.
Major regulatory bodies such as the Financial Conduct Authority(FCA) and the Cyprus Securities and Exchange Commission (CySEC). Both of these regulatory bodies enforce strict rules on those who break them but still allow breathing room for both brokers and traders to operate in a relatively free market. This is dramatically different from the SEBI, which enforces several stringent rules as mentioned above. Some of the differences can be mentioned in brief below:
- For instance, both the FCA and CySEC, have to comply with the MiFID or the Markets in Financial Instruments Directive. Not only does it allow reliable FX brokers based in one EU nation to conduct business all over the EEA countries, but it also enforces certain rules.
- Under MiFID regulations, brokers are forced to provide mandatory investor compensation via a refund of deposited funds in case the broker goes bankrupt.
- MiFID also enforces rules such as minimum capital requirement and forces brokers to maintain segregated and audited accounts for their client funds.
- The SEBI however, does not enforce such additional rules and regulations on its brokers such as segregated accounts for client funds or any kind of negative balance protection.
- Indian traders are thus less protected in this aspect and are responsible for their own risk and reward while trading.
Final Thoughts
While it’s possible to trade FX from within India, Indian traders have to take into account various factors and limitations that the country’s regulatory bodies enforce. The fact that the Indian forex market regulations are rigid in comparison to some of the other markets in the world is apparent. However, with the advancement of internet technology and the emergence of online brokers, the gap between Indian traders and the global forex market is slowly being bridged. There are many reliable international brokers that offer local deposit options for their Indian traders to avail themselves.