i. The Foreign Exchange Management Act lays down the provisions for dealing in forex in India.
ii. Indian citizens can only trade a limited currencies and this is to be traded on a certain exchanges only.
iii. Regulations are there in place to limit the outflow of foreign currency.
Legal in India?
Forex trading in India is very much sought over. There are lots of questions over its legality though, and there are lots of individuals that are misled by the information that is out there regarding the legality of forex in India. Forex trading is legal in India.
The world that we live in today has never been more global. Countries are interconnected with each other for various purposes.
At some point in time, a particular country will have transacted with another country. This transaction would have become impossible if a country does not deal in foreign currencies and has made it illegal to do so.
India has always been a reputed member among the group of major nations. India is one of the leading importers and exporters of goods and services in the world.
Hence, there is no scope for making forex trading illegal in the country.
In India, forex trading happens at two levels, one at the government level and the other at the retail level. The Reserve Bank of India, which is the federal bank of the country, maintains a foreign currency reserve.
This reserve is maintained in order to manage the total outflow and inflow of currency that takes place between India and other countries. This is done in order to maintain the value of the Rupee and to keep its value stable.
At the second level, forex is traded by retail participants for various reasons, business, speculation, investment, and tourism. This is where the restrictions for forex trading come in.
The Foreign Exchange Management Act, which is the primary law in India regarding the foreign currency and its exchange, lays down that no Indian citizen can trade foreign currencies.
Forex and India
Forex trading is legal in India but it comes with certain restrictions. The laws in India allow Indian citizens to trade only those currency pairs that are paired along with the Rupee.
Indian citizens are allowed to trade only the following currencies - the Dollar (USD), the Euro (EUR), the Pound (GBP), and the Yen (JPY). Currency pairs such as USDINR, EURINR, GBPINR, and JPYINR are allowed to be traded by the citizens of India.
The law also states that Indian citizens can trade these currency pairs only through the NSE, BSE, and the MCX-SX. These are the major exchanges in India and are the only authorized bodies for foreign exchange.
How to trade forex in India?
As per the law, Indian citizens can trade only a specific list of currencies and only through Indian exchanges. There are many forex broker firms in India that provide access to traders to these exchanges allowing them to trade the currencies.
Indian citizens are allowed to trade only the exchange-traded derivatives. These are contracts that the exchange provides, of an underlying asset that can be traded on the exchange by traders or investors.
These contracts include futures contracts, options contracts, forwards contracts, etc.
In regards to the foreign currencies, the three major exchanges have futures and options contracts of currency pairs including the Rupee that Indian citizens can trade.
In 2015, the RBI made it legal for Indian citizens to trade cross currency exchange-traded derivatives of the above-mentioned foreign currencies. Brokers were allowed to provide these contracts for trading to their clients.
Why are there restrictions on forex trading in India?
The RBI, which is the federal bank of the country, has put restrictions on forex trading through the FEMA act. These restrictions have been put in after careful and thorough planning by the authorities.
The reason put worth by the RBI for these restrictions is to control the outflow of the foreign currency and to protect the Indian citizens from losing capital in the forex market.
Every time an Indian citizen converts Rupee in Dollar, they are basically buying the Dollar from the RBI. If this Indian citizen sends this Dollar out of the country, the RBI or the country is in a net loss of the currency.
In forex trading, citizens will require to deposit dollars or some other foreign currency in their trading account with a broker. This will result in the foreign currency being sent out of the country.
The RBI also acknowledges the fact that forex trading involves lots of risk on capital, hence every time an Indian citizen loses money in forex trading, it is also a loss for the RBI. In order to curb this, there are restrictions on forex trading.
The Foreign Exchange Management Act (FEMA) has made it illegal for Indian citizens to deal in foreign currencies other than those mentioned above. Indian citizens found violating this will be put behind bars.
I also want to add that you should not get discouraged by these restrictions and steer away from trading forex in India.
These restrictions have been put in place for genuine reasons to protect the foreign currency reserve of the RBI. We cannot change these rules but must work along with them.
India has come a long way in dealing with foreign currency trading. Earlier trading was allowed only in the Dollar, then restrictions were relaxed and other currencies were also allowed to be traded.
With time, cross-currency derivatives of these currencies were also allowed. As the world is evolving and as India is becoming a major nation, these restrictions have been getting relaxed.
The currency pairs that are allowed to be traded in the Indian exchanges are like any other currency pair. You can always apply the various types of analysis at hand in order to make trading decisions.
Do you trade forex?
If you are from India and you trade forex do let me know. I’d also like to know which currency pairs you trade and what trading strategies you use to capitalize on the price swings in these currency pairs.
Do share this blog post with other traders you know and let them also understand the forex trading scenario in India and maybe they could also participate in this market.
Feel free to reach out through the comments section for absolutely anything and I will get back as soon as possible.