What is Forex Trading: Is it legal to trade currency pairs in India?

Forex trading, also called currency trading, is the process of buying and selling currency pairs in the foreign exchange market. This market is the largest financial market in the world, where traders aim to profit by taking advantage of currency price changes.

Forex is short for foreign exchange, and it involves the trade of currencies like USD/INR (US dollar to Indian rupee). The word “Forex” is coined from a combination of the two words i.e. “foreign” and “exchange”. Forex is also known as FX.

How Forex Trading Works

Forex trading happens online through specialized trading platforms, and it is done on a global network of brokers and computers. Unlike other markets, there is no physical location where these trades take place.

The Forex market operates 24 hours a day and is open 6 days a week (from Sunday 5:00 pm ET to Friday 5:00 pm ET), covering four major time zones:

• London
• New York
• Sydney
• Tokyo

At any given time, at least one of these markets is always open, ensuring that the market is active 24/7.

Types of Forex Trading

In Forex trading, there are three main ways to trade currencies:

• Spot Trading: This is the most common type, where trades are settled immediately.
• Forward Trading: Agreements to buy or sell currencies at a future date at a specific price.
• Futures Trading: Similar to forward trading, but with standardized contracts traded on exchanges.

Retail Forex Trading

Retail traders participate in Forex through the Over-the-Counter (OTC) market, often using online trading platforms. This market is also known as the spot market.

In spot Forex trading, traders do not physically exchange currency; instead, they enter contracts. For example, in the USD/INR pair, you are buying USD and selling INR based on the contract’s value changes. When the trade is closed, the profit or loss is settled in cash, and no currency is physically exchanged.

Leverage in Forex Trading

Forex trading allows leverage, which means traders can control a large position with a small amount of money. The leverage ratio in Forex is often high, around 20-30 times the amount you invest. While this can lead to significant profits, it can also result in significant losses if not managed carefully.

Forex Market Structure

The Forex market has two main levels:

• Interbank Market: Large banks trade currencies in this market.
• Over-the-Counter (OTC) Market: This is where individual traders participate using online platforms. It is also known as the retail market.

Risks in Forex Trading

While Forex trading can be profitable, there are significant risks involved:

• High Leverage: Forex trading allows for high leverage, meaning you can control a larger position with a smaller amount of capital. However, this can result in larger losses as well as profits.
• Lack of Regulation: The Forex market is not as heavily regulated as stock markets, which can increase counterparty risk (the risk of the other party failing to meet their obligations).

Forex trading is a popular way to make money by speculating on currency price changes. It offers high profit potential but also comes with substantial risk due to high leverage and low regulation. Traders should understand how the market works and manage risks carefully.

Why Do Many Traders Prefer Forex Trading?

The foreign exchange market (Forex) is one of the largest and most active financial markets in the world, even bigger than the US stock market. Let’s break down why so many traders are drawn to it.

1. Huge Market Size and Liquidity

Forex is known for its liquidity, meaning that it’s easy to buy or sell currencies without affecting their price too much. According to a report from the Bank for International Settlements (BIS), daily trading in Forex reached an astonishing 7.5 trillion USD in April 2022 (link). This massive amount of trading ensures there are always opportunities to enter or exit trades, making it a favorite for traders.

2. Trade from Anywhere

Another big reason traders love Forex is that they can trade from anywhere. Whether you’re at home, at the office, or on vacation, as long as you have an internet connection, you can access the Forex market. This level of flexibility is a huge advantage for people looking for a convenient and portable way to trade.

In short, Forex trading offers liquidity and flexibility that attract traders worldwide. With the ability to trade huge amounts of money and the convenience of being able to trade from virtually anywhere, Forex stands out as a top choice for those in the financial markets.

What Is a Currency Pair?

In the forex market, traders buy and sell currencies by pairing them together.

For example, the US dollar (USD) and the Indian Rupee (INR) form the currency pair USD/INR. This means one currency is being traded against another, and this is known as a currency pair.

Why Do Currencies Trade as a Pair?

It’s standard practice to trade currencies in pairs because the value of one currency is always measured against the value of another. Here are some of the most popular currency pairs:

• EUR/USD – Euro vs US Dollar
• USD/JPY – US Dollar vs Japanese Yen
• GBP/USD – British Pound Sterling vs US Dollar
• USD/CHF – US Dollar vs Swiss Franc
• AUD/USD – Australian Dollar vs US Dollar
• USD/CAD – US Dollar vs Canadian Dollar

Understanding Currency Pair Quotes

A currency pair shows the value of one currency against another. The standard format for quoting a currency pair is:

Base Currency / Quotation Currency = Value

• Base Currency: This is the first currency in the pair, and it is always quoted as 1 unit.
• Quotation Currency: This is the second currency, which shows how much of it is needed to equal 1 unit of the base currency.
• Value: The current exchange rate or value of the quotation currency against the base currency at that moment.

For example, let’s look at the USD/INR pair with the value 83.7501.

• Base Currency: USD (1 unit of the US Dollar)
• Quotation Currency: INR (Indian Rupees)
• Value: 83.7501 (1 USD equals 83.7501 INR)

So, in simple terms, 1 USD = 83.7501 INR.

What Happens When the Currency Pair Value Changes?

If the USD/INR value increases, it means that 1 USD can now buy more Indian Rupees. When the value of the base currency (USD in this case) rises, the quotation currency (INR) becomes weaker.

Common Forex Trading Scams

While Forex trading itself is a legitimate way to exchange currencies and make profits, there are scams in the market, just like in any other financial sector. These scams can take many forms, from dishonest brokers to fake trading systems. Here’s what to watch out for:

1. Unrealistic Promises of High Returns

Some scammers pose as top financial advisors or expert managers and promise high returns with little to no risk. They convince new investors to hand over their money with the promise of easy profits. However, these scammers often use the money to trade for themselves.

2. Ponzi Scheme

In a Ponzi scheme, scammers take money from new investors and use it to pay returns to earlier investors. This creates the illusion of a profitable business, but in reality, no actual trading is taking place. When new investors stop coming in or demand their money back, the whole system collapses.

3. Unlicensed Brokers and Unregulated Services

Some scammers operate without proper licenses or regulations, offering Forex trading services to new traders. If you’re not careful, you could end up with a broker who has no oversight or protection for your investments. These scammers may even refuse to allow you to withdraw your funds, leaving you unable to recover your money.

4. Withdrawal Problems

A common tactic among scammers is to prevent investors from withdrawing their funds. In some cases, they claim that the investor has to meet certain conditions before withdrawing, or they simply refuse outright. This is a red flag, and it’s important to avoid such brokers.

How to Protect Yourself from Forex Scams

• For Indian Traders: Make sure you open your trading account with a SEBI-registered broker and follow the guidelines set by the Reserve Bank of India (RBI).
• For Traders Outside India: Always check your country’s specific regulations and choose brokers or platforms that are properly licensed and regulated.

Is Forex Trading Legal in India?

Forex trading in India is regulated by key authorities such as the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Foreign Exchange Management Act (FEMA). While forex trading is legal in India, there are strict regulations in place to ensure that it is done in a controlled and authorized manner.

Key Regulatory Authorities

• RBI (Reserve Bank of India): The RBI controls foreign exchange transactions in India. It regulates which forex transactions are allowed and sets the rules for how they can be executed.
• SEBI (Securities and Exchange Board of India): SEBI regulates forex brokers and trading on the Indian stock exchanges, ensuring that forex trading is safe and legitimate.
• FEMA (Foreign Exchange Management Act): FEMA outlines the rules for forex transactions in India. It ensures that transactions only occur for authorized purposes.

Reserve Bank Of India (RBI) has issued the foreign exchange management (permissible capital account transactions) regulations, 2000 (link).

This regulation has specified transactions which are permissible to a person resident in India in Schedule I. Schedule II has a list of permissible classes of transactions made by persons resident outside India.

What Are the Rules for Forex Trading in India?

• Only Authorized Platforms: In India, forex trading can only take place on authorized electronic trading platforms (ETPs) and recognized stock exchanges like the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), and Metropolitan Stock Exchange (MSE).
• Permitted Forex Transactions: Indian residents can only conduct forex transactions for authorized purposes such as:
  • Traveling abroad
  • Education
  • Export business
• Illegal Forex Platforms: The RBI warns against using unauthorized forex platforms. Trading on these platforms can lead to legal consequences under FEMA. It is illegal to send or deposit money for forex transactions on these unregulated platforms. In India, forex trading platforms are banned.

The list of RBI authorised electronic trading platforms (ETPs) is available here.

What Types of Forex Trading Are Allowed in India?

The RBI has permitted Indian retail traders to trade in the forex market via currency futures. This regulated market lets Indian residents trade currency futures contracts.

Currently, currency futures trading is smaller than the global forex market.

In 2008, SEBI approved the National Stock Exchange (NSE) to offer forex trading in India through listed futures and options.

Three stock exchanges—NSE, BSE, and Metropolitan Stock Exchange of India—handle forex trading in India, regulated by both SEBI and RBI.

Currency trading in India is limited to 7 pairs: USD/INR, EUR/INR, JPY/INR, GBP/INR, EUR/USD, GBP/USD, and USD/JPY.

Indian exchanges offer currency derivatives like futures on 4 pairs: 

• US Dollar – Indian Rupee (USDINR), 
• Euro – Indian Rupee (EURINR), 
• Japanese Yen – Indian Rupee (JPYINR), 
• Pound Sterling – Indian Rupee (GBPINR).

They also offer cross-currency futures and options on 3 pairs: 

• Euro – US Dollar (EURUSD), 
• Pound Sterling – US Dollar (GBPUSD), and 
• US Dollar – Japanese Yen (USDJPY).

Only SEBI-registered brokers provide exchange-traded currency derivatives in India. They do not offer traditional forex trading (non-deliverable spot forex) due to restrictions from RBI and SEBI.

How Are Forex Brokers Regulated?

• SEBI-Registered Brokers: Forex brokers in India must be registered with SEBI to operate legally. These brokers can offer exchange-traded currency derivatives but are not allowed to offer traditional non-deliverable spot forex trading, which involves the immediate exchange of currency without delivery.
• Foreign Brokers: If you’re considering using a foreign broker for forex trading, be cautious. The RBI maintains a list of unauthorized entities that are not allowed to deal in forex or operate trading platforms. Trading with these entities can lead to serious legal issues.

Risks of Trading on Unauthorized Platforms

While there may be many advertisements offering forex trading services to Indian residents on social media or other online platforms, it’s important to remember that these offers may not be legitimate. Unauthorized forex platforms are illegal and can expose traders to financial fraud. The RBI has specifically warned against engaging in forex transactions on such platforms.

To trade legally, you must use approved brokers, authorized dealers, or licensed electronic trading platforms. The trading of currencies on unauthorized platforms can lead to penalties under FEMA. Always ensure that you are using a SEBI-registered broker and trading on recognized exchanges like the NSE, BSE, or MSE to avoid legal troubles and financial risk.

By adhering to these regulations, you can participate in regulated forex trading in India safely and legally.

RBI Alert: List of Unauthorized Entities for Forex Trading in India

If you’re considering using a foreign broker for forex trading, check the RBI’s alert list of unauthorized entities before proceeding. These entities are not allowed to deal in forex under the Foreign Exchange Management Act, 1999 (FEMA), or operate electronic trading platforms for forex transactions. Refer RBI’s press release.

Misleading ads from unauthorized entities offering forex trading to Indian residents can be found on social media and other platforms. RBI has warned the public against using these platforms for forex transactions.

RBI has warned the public about unauthorized entities promoting forex trading on social media and other platforms.

Here’s a alert list issued by RBI:

RBI also states that, the Alert List published by them is not exhaustive and is purely based on what was known to the Reserve Bank of India (RBI) at the time of publication. 

If an entity is not appearing in the Alert List, it should not be assumed to be authorised by the RBI.

Remember, forex trading in India is limited to exchange traded currency derivatives and futures.

How to check SEBI approval for currency trading in India?

To check if a broker is SEBI-authorized, find the registration number in the disclosure text at the bottom of their homepage.

You can also verify the broker’s authorization on SEBI’s website. If you’re interested in online forex trading in India, ensure the broker is SEBI-registered. These brokers allow trading on recognized stock exchanges like BSE, NSE, or the Metropolitan Stock Exchange.

Here is the list of SEBI-registered stock brokers in the Currency Derivative Segment (link).

Using unauthorized trading platforms or methods for forex trading in India is a punishable offense.

Reports say the Enforcement Directorate (ED) has frozen OctaFX and its related entities’ bank accounts, totaling Rs 21.14 crore, in connection with illegal online forex trading through international brokers under the Foreign Exchange Management Act (FEMA).

You can file a complaint against unauthorized forex trading platforms on the National Cyber Crime Reporting Portal (https://cybercrime.gov.in). Complaints can also be made to the Enforcement Directorate (ed-del-rev@nic.in) or local police authorities.

In summary, in India, trading in the global forex market through unregulated platforms is illegal. Forex trading should be done through SEBI and RBI-approved platforms or brokers on centralized stock exchanges like BSE or NSE.

Also Read: Why traders prefer Forex trading: Learn what makes FX trading unique

Frequently Asked Questions-FAQs

How to check RBI approved authorised dealers?

You can check authorised status online on RBI website to know who is approved and whose licence is cancelled.

Here is the link

Link to check the list of full fledged money changers.

List of full fledged money changers where Licence is cancelled.

What are currency derivatives?

Similar to stock futures and options (F&O), currency derivatives are F&O contracts traded on exchanges like NSE and BSE.

Future and Options are financial derivatives which allow a trader to speculate on the price movements of an underlying asset without actually owning it. In India, we have future contracts and options to trade for crude oil, stocks, nifty, bank nifty, natural gas, gold, silver, currencies and many other commodities.

A future contract obligates the buyer to buy an underlying asset, while the seller must deliver it at a predetermined price and date.

Whereas in option contracts, the buyer has rights but not the obligation to buy or sell the underlying asset at a predetermined price and date, while the seller must honour the contract if the buyer chooses to exercise it. 

Here is the list of registered stock brokers in currency derivative segment (link).

What is the lot size in currency derivatives in NSE?

Lot size in currency contracts on the NSE represents the standardised quantity of currency units that can be traded within a single contract.

In simpler terms, it represents a minimum amount of a specific security eligible for trading in a single transaction.

You can find lot size details on NSE here (link).

What is the best currency pair to trade?

Based on volume and liquidity, major currency pairs includes followings;

• EUR/USD – the euro vs the US dollar
• USD/JPY – the US dollar versus the Japanese yen
• GBP/USD – British pound sterling versus the US dollar
• USD/CHF – the US dollar versus the Swiss franc
• AUD/USD – the Australian dollar versus the US dollar 
• USD/CAD – the US dollar versus the Canadian dollar

Cross currency trading means a currency pair or transaction that does not involve the U.S. Dollar or home currency.

What is pip?

Point in price (pip) means the smallest movement or change in the valuations of the currency pair.

For example, assume that the USD/INR rate is 82.7502 today and it becomes 82.7501 on the next trading day. In this case, the point in price (pip) would be 0.0001.

What is an Electronic Trading Platform (ETP)?

Electronic Trading Platform (ETP) is a system where instruments like securities, money market instruments, foreign exchange instruments, derivatives, etc. are contracted.

No one can operate ETP in India without prior approval of the RBI.

You can check the authorisation status of any person / ETP from the list here published by RBI.

Who is a famous currency trader?

George Soros

George Soros is a Hungarian-American billionaire investor. As of October 2023, he had a net worth of US$6.7 billion. Soros is known as “The Man Who Broke the Bank of England” as a result of his short sale of US$10 billion worth of pounds sterling, which made him a profit of $1 billion, during the 1992 Black Wednesday UK currency crisis. (source: WIKIPEDIA)

Thanks for reading our article on What is Forex Trading: Is it legal to trade currency pairs in India?. 

You are requested to go through the following links to understand how forex transactions and FX trading is regulated in India.

List of authorised Electronic Trading Platforms (ETPs)

FAQs issued by RBI on Foreign Exchange (Forex) Transactions (link)

RBI’s Master Circular on Risk Management and Inter-Bank Dealings (link)

Disclaimer: In addition to the disclaimer below, please note, this article is not intended to provide investing or trading advice. Trading in the stock market and in other securities entails varying degrees of risk, and can result in loss of capital. Most investors and traders lose money. Readers seeking to engage in trading and/or investing should seek out extensive education on the topic and help of professionals.