Forex trading in India has become extremely popular, with daily traded volumes of more than $6 trillion globally, making it the most lucrative activity for Indian traders and a significant target for financial criminals. This has attracted strict oversight by forex regulators in India and other parts of the world.
Currency trading or forex trading is conducted over an OTC platform where individual traders bet on currency prices against domestic currency. However, before investing in the forex market, traders must understand the benefits and risks of forex trading and choose legal forex brokers in India. Every forex business must balance client onboarding, fraud prevention, and AML compliance to keep trading activities flawless and profits high. Legal compliance procedures are essential to prevent traders and institutions from being exposed to terrorist funding, fraud, money laundering, and other financial crimes that may lead to massive losses.
This article will delve deeper into the primary considerations while looking for legal forex brokers in India and discuss the legal framework, guidelines, risks, and precautions for forex trading in India.
Legal Framework for Forex Trading in India
Foreign exchange in India was initially considered a controlled asset due to its restricted or limited availability. During the initial stages of forex management, India focused on controlling forex by regulating demand and supply. The Reserve Bank of India (RBI) oversees forex trading. It has established rules and regulations to ensure an open and fair forex market and protect and secure client funds.
According to the Foreign Exchange Management Act (FEMA), trading in foreign currencies is legal in India but comes with specific rules and restrictions. There are four currencies – US dollars (USD), Great Britain pound (GBP), European euro (EUR), and Japanese yen (JPY) – that can be traded or paired with Indian rupees (INR). The RBI has the power to take strict actions against unauthorized forex trading platforms and cautions Indian traders to avoid entities that are neither authorized by FEMA nor authorized to function as electronic trading platforms for foreign exchange transactions.
The Securities and Exchange Board of India (SEBI) also grants authorization known as SEBI Forex Authorisation to forex brokers and organizations that allow them to conduct foreign exchange activities in the country in the financial market. Every entity requires this authorization if they provide forex services within the regulated financial market in India. This authorization is needed for national and international entities, making the forex market more secure and safer for Indian citizens.
Legal forex trading in India refers to exchanging permitted foreign currencies on legal forex brokers that SEBI-registered. Traders are recommended to use legal forex brokers in India that adhere to the rules and regulations laid down by FEMA. Any forex activity on unauthorized platforms not recognized or registered under FEMA is a penal offense. Exchanging foreign currencies not permitted in India also falls under non-compliance with Indian forex trading regulations. Any illegal trading can be fined up to Rs. 10,000 a day for every day of violation. According to the Act under Section 13 1C, forex traders and forex brokers indulging in illegal activities may also face jail time for up to 5 years.
In 2022, RBI issued an Alert List of forex brokers in India who were neither authorized to deal in foreign exchange nor authorized to operate electronic trading platforms for foreign exchange transactions. It cautioned Indian traders and reiterated that they undertake forex transactions on approved media for only permitted purposes under the FEMA. While only allowed foreign currencies can be traded electronically, they should also be executed only on RBI-recognised and authorized ETPs. Around 34 forex trading platforms were banned by the Reserve Bank of India, making all trading actions on those platforms illegal and punishable.
Guidelines for Forex Trading in India
The Reserve Bank of India monitors foreign exchange or forex transactions in India via the Foreign Exchange Management Act or FEMA. Before making foreign exchange transactions, traders should be aware of the guidelines for forex trading in India. For a successful forex transaction undertaken according to the policies of RBI, traders and forex brokers must comply with RBI-SEBI requirements. Transfer of funds should be according to the purposes approved by RBI and the guidelines set by SEBI–
- KYC document requirements while buying or selling foreign currencies.
- A maximum limit on the purchase of forex is up to $25,000 or equivalent in other currencies.
- A maximum transaction value of not more than Rs.50,000 via cash or online payments.
According to the regulations of RBI and SEBI, typical currency trading is not allowed, and traders are not permitted to exchange any currency they want at any point in time. Forex trading in India is allowed only with INR as the base currency. All electronic or online overseas trading is subject to certain legal charges. Binary trades (transactions between traders and forex brokers) are not allowed in India without any third party involved.
According to the Liberalised Remittance Scheme under the RBI regulations, an individual cannot use money transferred abroad to provide a margin for forex trading or speculative purposes. Forex trading in India can be legally done only in four currency pairs, USD/INR, EUR/INR, GBP/INR, and JPY/INR.
Indian residents can undertake forex transactions with authorized platforms only for permitted purposes. Buying and selling foreign currencies for undertaking tom, spot transactions and forex cash are permitted for capital or current accounts. Permitted purposes depend on the currency pairs being used in the foreign exchange. India’s qualified forex derivatives products include forex forward, forex swap, currency swap, purchase of call and put options, and spreads for retail users.
Risks and Precautions for Forex Trading in India
Like any other form of trading, Forex trading involves risks and uncertainties. It is a highly liquid and the world’s largest financial market, so risks like huge losses are higher. However, a certain degree of risk traders must inevitably face while participating in forex trading. Correctly understanding the uncertainties and dangers can help traders avoid trading losses. Different forms of risks are associated with forex trading, such as leverage, transaction, counterparty, interest rate, and market risk. The volatility of leveraged trading, political issues, time differences, and asset liquidity are some examples of risks or catalysts driving significant losses in forex trading. Moreover, the final impact on financial markets and currency pairs also plays an essential role in how traders experience their forex trading activities.
To sustain forex trades profitably, being in a secure position is essential. Before entering the world of forex trading, traders must have some market experience. Open a practice or demo account before putting natural capital into the market. Monitor the forex market by following profits and losses. However, more is needed to sustain trade positions. Traders must broaden their research and track all trading activities, and learn about the forex signals to understand the market better.
Moreover, the forex market is highly volatile, and rapid fluctuations in currency prices might force traders to change their direction of trading plans. Hence, it is essential to avoid getting diverted and stick to trading goals using appropriate time frames and trading only what the traders can afford to lose. The forex market can be risky and enticing, but traders can use price fluctuations by understanding the market thoroughly. Note that if any forex trader has any dispute against any listed brokerage company on default or delay in processing their requests, they can always file for arbitration with a registered Stock Exchange, according to SEBI guidelines.
Conclusion
Forex trading is available in India 24 hours from Monday to Friday, with active markets that provide tight spreads and plenty of opportunities to make profits through high volumes of trades. With a limited number of currency pairs, such as USD/INR, EUR/INR, GBP/INR, and JPY/INR, traders can trade currencies by opening a trading account and gaining access to any trading portal of a registered SEBI-registered stock broker.
Platforms like National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) offer multiple currency derivative contracts for public trade. There are certain aspects of forex trading that traders must learn and experience before entering the currency market. The more time they spend trading with a demo or practice account, the better they will understand the working of foreign exchange. It is also important to note that traders must always follow safety rules before giving a kick-start with their forex trading journey in India.
