The legality of Forex trading in India has been one of the most contentious topics, especially given the RBI’s (Reserve Bank of India) strict rules and regulations. Typically, Forex investors and traders must adhere to these rules and regulations whose core objective is to “protect our people and country from loss.” We will discuss Forex trading in India RBI guidelines and discuss how to find the most suitable Forex broker.
The shortest answer to whether Forex trading is legal in India is YES. However, as we will comprehensively discuss, the regulations applicable depend on whether you are trading spot or futures Forex or trading Forex CFDs.
The Reserve Bank of India and the Securities and Exchange Board of India (SEBI) maintain a tight regulation on Forex spot trading. As contained in the Foreign Exchange Management Act (FEMA), the RBI guidelines highly restrict the currency pairs to be traded in the spot and futures Forex markets within India. More so, it only stipulates that SEBI-licensed brokers execute these transactions. The RBI Forex trading guidelines also outline the punishment for infringing on these guidelines.
However, the situation is different for Forex CFD trading in India. Typically, Forex CFD trading is done through offshore Forex brokers. These brokers are not within the regulatory restrictions of RBI and SEBI. That means that they do not necessarily need RBI’s or SEBI’s stamp of approval to offer CFD trading services to Indian nationals and residents. So, in a nutshell, you can use Forex CFD trading in India is legal.
How to do Forex Trading in India Legally?
Typically, Forex trading for retail investors in India is straightforward. The rules and regulations set by the RBI are mainly targeted at financial institutions and Forex brokers who wish to set up Forex trading business in India.
As an Indian citizen or a resident in India, for you to trade Forex legally, all you need to concern yourself with is whether your preferred broker is compliant with the rules and regulations of RBI and SEBI. These are the only two financial regulatory authorities in India that regulate and oversee the financial trading activities within the country.
Typically, as a retail trader, you are only trading Forex CFDs instead of trading currency in the spot market. We’ll explain later on why trading Forex CFDs is especially preferred by small scale retail traders. However, for large scale traders (mainly corporations) who intend on trading Forex spot or futures market, the RBI requires them to do so through three major exchange houses. They are BSE (formerly Bombay Stock Exchange), NSE – National Stock Exchange of India Ltd., and Multi Commodity Exchange (MCX).
These exchanges strictly adhere to the Foreign Exchange Management Act (FEMA). This Act was designed “to consolidate and amend the law relating to foreign exchange to facilitate external trade and payments and promote the orderly development and maintenance of foreign exchange market in India”.
There is a strict limitation on the number of currency pairs they can trade or exchange for these traders. The only Forex pairs permitted include USD/INR, GBP/INR, EUR/INR, and JPY/INR. Notably, this is restrictive compared to over 60 CFD Forex pairs available for trading from offshore Forex brokers.
So, the answer to the question ‘Is Forex trading legal in India?’ is Yes but ensure to follow the rules.
Forex Trading in India RBI Guidelines
Pre 2013, there weren’t so stringent Forex trading regulations in India. However, due to the record fall of the Rupee in 2013, the RBI had to repeal the Foreign Exchange Regulation Act to keep up with the new Forex trading reality. The RBI guidelines were designed to control and regulate all international currency trade and remittance of payments. It was also intended to develop a strong domestic Forex exchange market with a robust regulatory framework.
As we’ve already mentioned, the Reserve Bank of India is the apex financial authority dictating the rules and regulations for Forex trading in India. So here are the most consequential guidelines that impact Forex trading.
- Definition of foreign exchange as contained in section 2(n) of the Foreign Exchange Management Act (FEMA)
- Monetary deposits, credits and balances payable in any foreign currency,
- letters of credit or bills of exchange, travellers’ cheques, or drafts which are written in Rupee but are to be settled in any foreign currency
- Letters of credit or bills of exchange, travellers’ cheques, or drafts, drawn by foreign financial institutions or individuals, but are to be settled in Rupees.
- FEMA restrictions:
- Indian residents should not receive any monetary payment on behalf of foreigners – whether the payment is denominated in Indian Rupees or foreign currency.
- It is illegal to transfer foreign exchange or securities to non-authorized persons as defined by the Act.
- Indian nationals are prohibited from entering into financial transactions in India intended to acquire foreign assets
- Indian nationals travelling abroad would need RBI approval for any foreign exchange requirements for more than 10,000 USD in a single financial year. However, if the foreign visits are for education, medical, or employment purposes, this amount is higher.
- Travellers from abroad have to surrender any unspent foreign currency in the first 180 days of their return. Note that one can only buy foreign currency within 60 days of international travel.
- There is no limit to the amount of foreign currency that one brings back into India from abroad. However, one would have to declare them if the amount exceeds $5000 by filling the Currency Declaration Form (CDF).
- FEMA penalties as stipulated in Section13 of the FEMA:
- Any Indian citizen found contravening the regulations stipulated by the RBI will be fined up to 3x the amount involved in the illegal transaction – given that the amount is quantifiable
- If the illegal transaction continues, they will be fined 5,000 Rupees every day
- The authority adjudicating the alleged infringement is empowered to cease all foreign exchange holding of the entity found guilty
- This Act doesn’t apply to Indian citizens residing abroad.
- Legal Forex pairs
As we have stated before, trading for Indian residents to trade in the spot market must do so only through India-based brokerages directly linked to NSE, BSE, and MCX. Some of the most popular brokerages include Upstox, Motilal Oswal, and Zerodha.
- JPY/INR (Japanese Yen vs Indian Rupee)
- GBP/INR (Pound Sterling vs Indian Rupee)
- USD/INR (US Dollar vs Indian Rupee)
- EUR/INR (Euro vs Indian Rupee)
In 2015, the Reserve Bank of India allowed trading of cross-currency futures contracts and options for the three major currency pairs – EUR/USD, GBP/USD, and USD/JPY.
With that said, when you opt to trade Forex through offshore CFD brokers, here are some of the most factors to keep in mind.
Only trade with a regulated broker!
As drafted, the RBI guidelines stipulate that offshore Forex brokers that facilitate spot Forex trading are outside SEBI’s jurisdiction. This means that Indian nationals cannot trade with them, as such trades would contravene the RBI guidelines.
This should not concern retail Forex traders since the RBI guidelines do not cover trading Forex CFDs. Note that international CFD brokers are not required to be licensed by SEBI or adhere to the RBI guidelines. That means that trading Forex CFDs is completely legal in India.
However, to avoid falling prey to unscrupulous Forex CFD brokers, always trade with regulated brokers. By this, we mean brokers that are licensed and regulated by reputable financial authorities like the FCA in the UK, CySEC in Cyprus, ASIC in Australia, MFSA in Malta, IFSC in Belize, SFSA in Seychelles, or FinCEN in the US.
Being under the supervision of these regulatory authorities means that the brokers are held to higher ethical standards. Although, as an Indian citizen or resident, you may not have SEBI or RBI’s protection, when the above authorities regulate an offshore Forex broker, you are guaranteed that you will be trading in a transparent environment and that your capital and earnings are protected.
FYI, you can find the information about a broker’s licensing and registration under the “About” section of their website. Finally, we just want to reemphasize the importance of following rules and regulations to smoothy trade the Forex market in India. It is crucial, so please ensure to follow the same. Happy Trading!