Forex trading or currency trading has become popular across the world during the recent years, and India is no exception either. Although the sector is still familiar in this country, more and more Indians are getting into trading. However, the problem is that most people are not aware of the rules and regulations regarding forex trading in India. They do not know if forex is legal, or how to trade forex in India, which makes them face severe consequences.
What is Forex Trading?
To put it simply, forex trading stands for purchasing and selling currencies. It is the largest financial market in the world that has an average turnover of $5 trillion per day. Not only it involves many people but also many currencies. Since a trader is always purchasing a currency by using another currency, they are ultimately trading currency pairs. You may trade major currency pairs, cross currency pairs, or exotic currency pairs.
Long and Short Currencies
In any financial market, long is the position where you own something, betting that its price will rise. Short is a position where you sell something you don’t own, expecting it to fall. In FX, every currency trade is both a long and a short—you are always selling one currency and buying another. For example, if you go long EURUSD, you own euros and owe dollars, hoping that the euro will go up against the dollar. If you are short EURUSD, you make money when the euro goes down. When you cover a position, you are said to be flat or square. If you hold a position past 5PM, you must pay one day’s interest on the currency you are short and you earn one day’s interest on the currency you are long. This is called the roll.
Is It Legal to Trade Forex in India?
Yes, it is. You can trade forex legally in India. However, there are not many options and opportunities for Indian traders like some other countries. Moreover, traders need to follow a lot of strict rules and regulations to avoid legal complications. If you want to trade forex legally in India, then there are certain factors that you need to acknowledge, including the legal currencies and regulated brokers. At the same time, you must follow the SEBI, RBI, and FEMA guidelines. So, before you start trading, make sure to learn the rules and guidelines first by visiting the authorised websites.
Guidelines of the SEBI for Indian Forex Traders
The Securities and Exchange Board of India (SEBI) is the regulatory body for commodity and securities market in India. The organisation operates under the jurisdiction of the Ministry of Finance, Government of India. Founded on April 12, 1988, it was given statutory powers through the SEBI Act on January 30, 1992. To know more about the SEBI and the role it plays in trading in India, visit here: https://www.sebi.gov.in/.
According to the guidelines of SEBI, forex traders residing in India are not allowed to trade any currency pairs that do not have INR as the base or quote currency, only except the three cross currencies. The INR is not only the official currency of India but it is also the legal tender in this country. So, as long as you are in India, it is illegal to transact in any other currency. Under the FEMA act, Indians cannot send the INR outside the country either to make investments or fulfil the purpose of currency conversions. To send the Indian Rupee to any overseas country, you must be approved by the Indian Government. Hence, the conversion of the INR to USD for forex trading is an illegal activity that can earn you a severe penalty along with prison. SEBI also imposes some restrictions on types of trading, maximum available leverage, and rules involving exotic currency pairs.
The Role of the RBI in Forex Trading in India
The Reserve Bank of India (RBI) is the central bank and regulatory body of India that operates under the jurisdiction of the Ministry of Finance, Government of India. It was founded in 1935. Along with several other responsibilities like regulating the Indian banking system, the primary duty of the RBI is to supervise the issue and supply of the Indian Rupee. This is what makes it involved with forex trading, because trading actively leaves some impact on the value of the Indian Rupee. Let’s explain this with an example.
Assume that as a trader, you want to purchase a currency with USD. Now, when you pay for the foreign currency from your INR bank account, the RBI has to pay on your behalf from its USD reserves. While it is our responsibility to protect our foreign reserves and strengthen the value of the INR, these kinds of activities can do the exact opposite. Earlier, there were not many regulations over trading, but as Indian reserves failed; the FEMA Act came into existence. The RBI played an important role in coming up with the guidelines of the FEMA Act. To know more about the guidelines, you can visit here: https://www.rbi.org.in/.
Legal Currency Pairs in India
You cannot trade just any currency pair in India. There are only seven currency pairs that are allowed for trading in this country, made of four different currencies. Earlier, it was decided that currency pairs with INR as the base currency would only be allowed. Therefore, the allowed currency pairs were USDINR, EURINR, JPYINR, and GBPINR. However, three cross currency pairs were added later. To the contrary of what is stated earlier about cross pairs, the definition is different when it comes to India. Here, cross pairs stand for currency pairs without INR. The three pairs added later are EURUSD, GBPUSD, and USDJPY.
Keep in mind that you cannot facilitate forex trading on any offshore exchange. It can only be done by the Indian stock exchanges, such as the Bombay Stock Exchange (BSE), National Stock Exchange (NSE), and Metropolitan Stock Exchange of India Ltd. You should also learn about the lot size before you start trading, the lot size for USDINR, GBPINR, and EURINR is 1,000 units. However, it is 100,000 units for JPYINR. The Indian currency market is supervised and regulated by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) jointly.
Forex Brokers to Trade in India
If you want to trade in India legally, then the only way to do so is trading through one of the forex brokers that are regulated by SEBI. Offshore brokers that offer trading services to Indian clients are not aware of the rules in this country or they simply do not care about the regulations. So, you cannot rely on them. SEBI regulated brokers include Alpari, HotForex, FP Markets, Axiory, FXTM, FBS, AvaTrade, and XM. Keep in mind that binary trading is not allowed in India. So, if you must choose an offshore broker, make sure that it does not offer binary trading services. However, it is recommended to stick to Indian brokers. Once you find the right broker, here is what you must do –
- Visit the official site of the broker and register with it to open a trading account.
- Verify your trading account with ID verification and address verification by submitting necessary documents.
- In India, you also need to complete the KYC (Know Your Customer) process to activate the account.
- Open a demo account at the same time and practice demo trading with virtual cash in this risk-free environment.
- Once you gather enough skills and experience about trading, deposit funds in your trading account and start trading.
The reason why you must practice on a demo account first is because you can trade with virtual cash in this account. So, if you are a beginner or want to test a new trading strategy, you can do it here without the risk of losing money.
Conclusion
Always remember that forex trading is full of risks. Yes, there are indeed opportunities to generate income, but that comes with high risks of losing your money. Getting involved in illegal activities only increases the risks as your forex holdings can also be confiscated by the Indian Government as a penalty. So, make sure to follow the SEBI and the RBI guidelines if you want to trade forex in India.