Whether forex trading is safe in India or not invokes the question if it is legal in this country. To answer this question honestly, the authorities in India do not allow a regular currency exchange approach. It means that no individual can exchange just any currency they want anytime. However, trading is somewhat permitted, as long as the base currency of the currency pair is INR. This rule has some exceptions, however; so let’s get into them.
Is forex trading safe in India? Before we answer that, let’s first understand what forex trading is. Forex trading or currency trading involves the buying and selling of fiat currencies. Due to high liquidity, the market holds great financial potential which attracts a huge number of investors. The concept is comparatively new in India. Although more Indians are discovering the appeal of the market and paying attention to it, there is much confusion since the government laws and legalities are still not clear to most people. Once we learn about the risks associated with illegal trading, we can pay attention to other risks after that.
Is Forex Trading Legal in India?
Forex trading platforms are banned in India. So, traders are not allowed to trade in the market directly. However, they can trade currencies via stock exchanges. There are only four currencies that are allowed to be paired with the Indian Rupee for trading: the US Dollar (USD), Great Britain Pound (GBP), Euro (EUR), and Japanese Yen (JPY). So, the currency pairs you can trade legally are USDINR, EURINR, JPYINR, and GBPINR. Apart from these, three cross currency pairs are allowed which are EURUSD, USDJPY, and GBPUSD.
Now, let’s come to the brokers. If you want to trade in India, then SEBI-regulated brokers are your best option. SEBI or the Securities and Exchange Board of India was founded in 1988. It regulates the capital markets and securities in India. Today, SEBI has more responsibilities including inspecting the records and shares of companies, as well as issuing licenses for brokers. So, let us take a look at SEBI’s regulations.
Safe Trading with RBI and SEBI
People who are confused about the legality and safety of trading in India may note that it is legal halfway, with the currency pairs mentioned earlier. However, keep in mind that an Indian is not allowed to be engaged in internet trading via online platforms. It is important to make sure that the INR can be strengthened while trading and not weakened.
You should know that the RBI is short on dollars. Now, for example, if Indian traders trade EURUSD and purchase dollars from the RBI to send the money out of the country, it will leave extra shortages for the RBI. USD is the most traded currency and if most Indians choose to trade it outside of the country, a time will come when the bank would have to purchase the USD with INR at cheaper rates. You may gather more information about the right way of trading from the RBI by clicking here: https://www.rbi.org.in/.
While the national currency is weak already, this kind of occurrence would weaken it more, which will involve the Indian government. Naturally, the government would take an initiative to prevent the devaluation of INR. So, if you become a part of this devaluation while trading forex, it can be risky for you. However, forex is originally a market that is highly decentralized and it is difficult to track down the market. Several American and European brokers offer their services to India, and Indian traders can start trading with these brokers, but at their own risk.
International brokers are not illegal; it is just that Indian citizens are not always allowed to use them as they are under the restrictions of trading with brokers registered under SEBI only and trading with INR only. If you can find a broker that fulfils these two conditions, you are free to trade on it. However, many Indian traders still get involved in illegal trading without checking if the broker is approved by SEBI. You may visit the official website of SEBI to know more about the guidelines: https://www.sebi.gov.in/.
Risks You Need to Be Aware of about Trading in India
Before getting into forex trading, you need to know about the risks that make your capital in danger. Some of the common risks circulating in the Indian forex market are –
- Replacement risk: This risk takes place when counterparties of a forex broker or a failed bank find that they are at risk of not getting their funds from the said failed institution.
- Credit risk: It stands for the probability that an outstanding currency position may not be repaid as agreed because of an involuntary action by the counterparty. This risk is a factor of concern mainly for banks and corporations. The risk is low for individual traders.
- Transactional risk: If there happens to be an error in communicating, handling, or confirming the order of a trader, it may result in losses that cannot be predicted beforehand. These situations are known as “out trades” in the financial markets. Even if the out trade takes place because of the fault of the dealing counterparty institution, it is the trader that would have to face the losses.
- Exchange rate risk: This situation may arise because of changes in the price of a currency. It is an effect of constant and generally volatile shifts in supply and demand balance across the world. When the trader’s position remains outstanding, the position is subject to all changes of value.
Tips to Avoid Trading Risks
You can sum up trading in two words: risk and reward. To be a successful trader, you cannot run away from risks. You must take risks for greater potential rewards, and you have to learn how to deal with those risks. Indeed, there are some risks like the ones mentioned above that occur due to situations that you have no control on. You cannot do much about those, but here are a few ways you may try to manage common trading risks:
- Research: Before you decide to invest in any currency pair, it is absolutely crucial to research the asset. Make sure to check its history, price movements, importance in the world economy, and more. You should also compare it to other pairs and consider if you should add something else to your portfolio. Being fully prepared and gathering as much information as you can lower your chances of losing a trade.
- Use stop-loss orders: A stop-loss order stands for an order that a trader can place to close a position when they lose a certain amount. It is placed to limit the loss of the trader in that particular trade. It is important to know when to give up on your trade or you may end up losing all your capital. So, it is best to maintain stop losses to minimize losses and maximize profits.
- Avoid overtrading: Overtrading is a very common mistake made by many traders. Even if there is no assurance in the market, you should always enter a trade only if you are confident about your prediction. It is an absolute must to avoid making irrational decisions. You may consider getting guidance from your broker or online trading companies on whether to open a position or not.
- Practice on a demo account: Whether you are a new trader or an experienced trader, the importance of demo trading can never be overlooked. A demo account provided by certain forex brokers allows you to trade with virtual money. So, you can test your trading strategies without the risk of losing real money.
At the end of the day, no matter what broker you choose or what your trading approach is, you must be cautious at all times about the risks as well as the law for safe forex trading.