The legality of forex trading in India has always been a contentious topic. Forex trading in India is subjected to various restrictions and limitations. These rules and regulations are maintained to safeguard its people from losses.
So, before getting into the legal aspects of forex trading in India, we must have some basic knowledge about forex trading.
What is Forex Trading?
Forex trading refers to the foreign exchange or trading of foreign currencies in the global market. Forex trading aka currency trading is the largest and highly volatile market in the world.
The forex market is decentralized in nature as the exchange is done over the counter section, in short, refer as OTC. OTC is a market where the exchange of foreign currencies takes place directly between the parties without any supervision.
On average, the daily transaction volume of the forex trading amounts to $5 million. Although it offers lucrative gain, it is dynamic and fluctuates continuously.
Understanding How the Forex Market Works?
The forex trading is similar to the trading of stocks; just like you purchase and sell a stock. It is synonymously referred to as currency trading in India. It is a marketplace of buying and selling of foreign currencies of different countries. One currency is traded in exchange for the other currency.
The two forex currencies involved form a currency pair which is represented by the three letters. Indian rupees are represented as INR, United States dollar as USD similar representation of other currencies
Suppose, an investor purchases currency pair USDINR where USD is US dollars and INR in Indian currencies. Let’s assume that time the current market price of the dollar is Rs. 67 and investors expect it to reduce Rs. 66.
The trade will be of short selling as when the value reaches Rs.66, he/she would get a profit of Rs. 1. On vice versa, if the value exceeds, there will be a loss. The reverse happens in the case of buy trading. In this case, the investor takes advantage of the rise in the price of the dollar.
Is Forex Trading illegal in India?
Forex trading is not illegal in India. It is legal to do for forex trading through the Security Exchange Board of India (SEBI) registered dealers. You can view the entire list of registered authorized dealers on the SEBI website.
Forex trading is possible in India only with Indian Exchanges like NSE, BSE, and MCX-SX offering forex instruments. With the help of the Indian Exchanges, you can trade currency pairs-GBPINR, USDINR, JPYINR, and EURINR.
However, from the year 2015 onwards, the Reserve Bank of India (RBI) has permitted the exchanges to offer cross-currency futures contracts and exchange-traded currency options in currency pairs EUR-USD, USD-JPY, and GBP-USD.
You must always use Indian currency; as base currency as non-INR currency trading is illegal in India according to the FEMA act. As per SEBI and RBI directives, no Indian citizen is permitted to trade forex via any electronic or online forex trading forum.
In simple words, an Indian citizen can do forex trading with currency pairs benchmarked against INR currency through listed forex trading portals.
Brokers in Forex trading
In forex trading, brokers are facilitating firms that help traders to access the global platforms for buying and selling foreign currencies. Although many countries provide flexibility in currency trading, in India, there are limitations and restrictions.
You need to have a thorough research of the legal aspect to enter currency trading in India. You can invest in the forex market through specified and authorized broker only. The forex broker must be registered at SEBI. And the majority of them will offer currency pairs with Indian rupees.
Forex Trading Strategies in India
With limitation and restriction, investors consider forex trading is risky. The high liquidity and decentralized nature can easily make you lose money than gaining profits. But with thorough research and proper strategy, you can enter the forex market.
Here some basic strategies of forex trading:
- Trend trading: The trader uses the trend of the price of the currency (upward or downward trends) to begin. In trend trading, traders analyze the price movements of the currency. With the help of several online tools available in the market, the traders can perform the analysis.
- Price Action strategy: is the most common strategy that a trader applies in the forex market. This strategy depends on whether the price action in the currency is bullish or bearish. It applies to all market conditions.
- Range trading: In range trading, the currencies are traded in a specific price range. The trader needs to look for a favorable market condition for trading, as the price level is driven by the demand and supply of the currencies.
- Countertrend trading: In this type of trading strategy, traders capitalize on small gain and trade with an expectation of a reverse trend against the current trend in the future.
- Position strategy: For a positioning strategy, you need to have strong market fundamentals and analytical skills. The experienced traders use this strategy with a thorough analysis of the entire day charts.
- Breakout trading: The trader uses this strategy to enter the market when the price movements emerge out of the previously defined trading range known as a breakout.
Basic Forex Trading Tips you Must Know
While choosing out a legal way of entering a forex market with approved and authorized brokers, you must know some basic tips. To begin forex trading on the proper notch, here some quick forex trading tips:
1. Identify your goals and trading strategy
Before starting, you must set your goals and trading strategy. The forex market works for 24 hours. You can choose your time.
2. Well-versed with fundamental lingos
There are basic forex terms that you must learn and get acquitted. You can get a grasp of the forex terminologies and fundamentals with the articles available over the internet.
3. Beware Scams
Even though the Indian government has laid restrictions to protect its people, the broker’s scams still exist. To avoid legal implications, illegal practices, and losses, be careful while collaborating with forex brokers. Compare them and ask for SEBI authorization.
4. Keep updated yourself with economic activities
The forex market is dynamic and fluctuates continuously. To gain money from forex trading you must study the market trends, read economic news, and keep yourself updated with international markets. You must track the price movements of the currency and set your goals.
Points to Remember
- In India, trading with currency pairs other than approved by the RBI is an illegal and punishable offense under the FEMA Act.
- Forex trading in India is legal only through authorized and registered brokers with SEBI.
- Trading through online brokers is a non- bailable offense in India and has serious legal consequences.
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Forex trading is not illegal in India. But the currency trading in India is limited to the regulation and restriction imposed by the RBI and SEBI. One must be cautious and well informed about these regulations while entering forex trading.