Is Forex Trading Legal In India 2024? – Forbes Advisor INDIA

The foreign exchange market is the world’s largest decentralized marketplace for buying and selling currencies. Millions of people around the world put in their money to make positions in different currencies, aiming to gain some profits from their fluctuating value. 

However, the Indian government has put several restrictions in place with the intention of protecting investors from losing their money, so much so that most people stay away from it. But is it entirely illegal in India? Let’s find out.

What is Forex Trading?

Forex trading, also known as currency trading, refers to the purchase/selling of international currencies on the foreign exchange market. Globally, there are three ways to trade in forex: spot, forward, and futures. While the spot market determines the exchange rates in real-time, the latter two are based on speculating on the price changes in a currency over a set duration.

According to a blog post by Motilal Oswal, one of the most reputed Indian financial service providers, forex trading has an average daily turnover of about $7.5 trillion. While this is a testament to the popularity of currency trading in the world, Indian investors should know the regulations, legalities, and restrictions placed on the practice by the central institutions: the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).

Read More: Best Forex Trading App

Who Regulates Forex Trading in India?

Foreign exchange trading is heavily regulated by three entities: RBI, SEBI, and the Foreign Exchange Management Act (FEMA) 1999.

The central financial institution, RBI, analyzes the world’s political and economic situations and manages the country’s foreign exchange reserves. It issues guidelines for authorized dealers (selected banks and financial organizations) to facilitate foreign exchange transactions, including trading, to individuals and businesses.

The main regulator of the country’s securities (such as stock, bonds, and derivatives) market, SEBI, aims to protect investors’ interests and develop/regulate the securities market through fair and transparent practices. The organization mandates that brokers providing forex trading services should be registered.

Formulated by the central government, the FEMA 1999 Act governs all foreign exchange transactions by setting limits and restrictions. It gives the central government the authority to regulate payments to/from someone outside the country. Furthermore, it also prohibits using unregulated platforms or binary trading options, which involve high risk and volatility.

To sum up, the RBI manages forex reserves, SEBI regulates the brokers, and FEMA sets the overall guidelines for forex transactions.

Forex Trading in India: What’s Legal, What’s Not?

According to a post by Kotak Securities, “Indian citizens are not permitted to trade in foreign exchange markets unless they are doing it for particular, authorized purposes, such as travel, education, or business, according to the RBI.”

To further clarify, an RBI FAQ page mentions that “resident persons undertaking forex transactions with unauthorized persons and for purposes other than those permitted under FEMA shall render themselves liable for penal action under the Act.”

Additionally, the SEBI restricts the registered broker’s ability to offer trading in four currency pairs, including USD/INR, EUR/INR, GBP/INR, and JPY/INR. While the currency on the left is the base currency, the currency on the right is the quote currency. Trading in other currency pairs is considered illegal in India.

To sum up, Indians cannot directly trade in the global foreign exchange market via unregulated, decentralized platforms as they are considered illegal. However, they can still trade in foreign currency derivatives on SEBI- and RBI-approved platforms or brokers via centralized stock exchanges, such as the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE).

• Forex transactions can be carried out via SEBI-registered brokers using an authorized dealer or bank that the RBI designates.
• The FEMA restricts binary trading, forex transactions for pure speculation, or forex trading via unregulated or international platforms.
• It also puts in a limit to the forex trade that one can place.
• Indians can still trade in foreign currency derivatives via the national stock exchanges available on authorized platforms.
• The permitted purpose for undertaking FCY-INR forex derivative transactions is hedging against exchange rate risk.

Challenges of Forex Trading in India

The increasing popularity of the futures and options market has led to an increase in the technical awareness among people, which in turn should make investing in currency derivatives via the NSE and BSE easier. However, the disadvantages of forex trading outweigh its perks. For instance, Indians cannot trade in the most common or minor currency pairs. Since very few brokers fulfill the regulatory criteria, they impose high fees on transactions.

To trade in the currency pairs legally in India, one must be aware of the different factors contributing to currency conversion, including inflation rates, fiscal policy, import/export, interest rate differences, geopolitical situations, and more. Last but not least, the forex market operates on high leverage, which generates quite a lot of opportunities for investors but poses equal risks.

What are the Best Forex Trading Platforms in India?

Some of India’s best forex trading apps, approved by regulatory bodies, are Zerodha Kite, Upstox, Angel Broking, Groww, ICICI Direct, and HDFC Securities.

There are other platforms that claim to provide high leverage rates and attract users with joining incentives, but most of them aren’t registered or approved by the government. In April 2024, RBI issued an alert list with as many as 75 unauthorized entities involved in forex transactions. Have a look at the platforms here.

How to Participate in Forex Trading in India?

• First, look for SEBI-registered brokers that offer the option to perform currency derivatives trading on nationalized exchanges like NSE or BSE.
• Given that you can only trade in Indian Rupee as the base currency, and that only four currency pairs are legal, you don’t have much choice. The available options include the US Dollar-Indian Rupee, Euro-Indian Rupee, British Pound-Indian Rupee, and Japanese Yen-Indian Rupee.
• Different currency derivatives (futures or options) have certain requirements, such as the minimum currency to be traded, the amount needed to be deposited upfront, the duration of the contract, and so on. Go through the contract carefully and be sure of all the different variables that can impact the trade’s value.

In conclusion, forex trading is not completely illegal in India. However, there are too many norms and nuances related to it, which compels regular investors away from it and toward easier options like stocks, bonds, mutual funds, etc.