You might come across many changes in various advertisements relating to online forex trading platforms on social media. Some of these also advertise in local Indian languages. These advertisements usually talk about how easy it is to trade in the forex market and make quick money.
However, like any other investment in the market, this also asks the investors to do their research and then invest their hard-earned money.
What is Forex?
Forex leads to the foreign exchange market, which involves buying and selling fiat currencies. It is one of the largest and the most liquid markets present on a global scale. With time, it has become a widespread practice among investors due to the financial potential. Accumulating wealth along with reaching impressive monetary gains is possible with the help of this forex trading.
Compared to others, it is a relatively new investment concept in India. Indian residents have directed her attention towards the market because of the appealing opportunities revolving around these transactions.
The primary question that now arises is that it is legally allowed to trade forex in India?
Is Forex trading allowed in India?
The authorities such as RBI (Reserve Bank of India) and SEBI (Securities and Exchange Board of India) are responsible for regulating these investments. According to the rules stated, a typical online currency approach isn’t allowed by the authorities. This means that you won’t be allowed to exchange any currency you want at any given time. Trading is permitted as long as the base currency INR is used.
Online or electronic overseas trading is subject to legal charges. Still, it is advised to avoid indulging in these approaches and limit the trade to the trading process regulated by the authorities, as mentioned above.
In India, the currency pairs such as the US Dollar and INR, EURO and INR, UK Pounds, and INR are the types of forex trades allowed.
How can I trade forex in India?
Many international Forex Brokers allow Indian residents to open accounts. Some of these bronzers even try to start training academies in the big Indian Cities. If you are an Indian resident and also wish to trade in the Forex market, then you cannot trade by all the trading instruments present in the market.
However, it seems that the global Forex market is not so global in India.
The forex trading platforms execute binary trades. This means that the trader either gets a fixed amount or nothing. To understand it better, let’s understand this with an example. You can bet whether the US Dollar would fall against the Indian rupee in the forex market or not. In case it does, then you get a fixed amount. And in case you lose, the platform keeps all the money. This, in turn, acts as a do-or-die movement.
Therefore, such binary trades are not permissible in India along with other parts of the world.
Binary transactions are the transactions between the trader and the platform. There is no third party involved in the process. Looking at how the story trading works, the role of the exchange is to provide a platform that helps facilitate the trade between the seller and buyer.
To help connect more traders, many online platforms even provide high leverage to the users. Some of them even advertise 100 times the amount that is invested. If you put Rs. 1000, you can trade for Rs. 1 lakh. Even if the trader utilizes the margins, the platform has nothing to lose as they don’t have any liability to be paid to the third party.
Still, the binary traders are not permissible under FEMA (Foreign Exchange Management Act). According to the RBI’s Liberalised Remittance Scheme, a person cannot use the money transferred abroad for speculative purposes or even provide margin money for trading. It allows investments that are based on delivery.
Indian residents can trade in the forex stock exchange but with certain restrictions. There are only four available currency pairs in India- US Dollars, Euro, Great Britain Pound, and the Japanese Yen. An investor can trade these four pairs by opening an account for trading with a broker. Because of these restrictions, India’s forex market is smaller compared to many other developed markets.
How to trade forex legally in India?
Let’s assume that you have to trade Euro and US Dollar, US Dollar and Japanese Yen or Euro and Japanese Yen or any other possible combination. Your local exchange doesn’t offer this kind of facility. If you traded EURINR and USDINR, that leads to INR getting eliminated and technically ending up with trading USD and EUR. It is a significant disadvantage of trading Forex this way as it increases the transaction costs and often lacks liquidity. Also, the CFD platforms are not legal in India. Looking at it from a broader perspective, leverage trading is also not allowed in India. A trader should know his limits and then act accordingly.
There are a few forex trade challenges faced by investors in this path , but if you follow the right course of action and understand the legal implications, you can become a successful trader.
Forex Trading Challenges in India
The regulation of the forex market is a difficult issue, it being an international market. It usually pertains to the sovereignty of the currencies of many countries. It thus creates a scenario where the Forex market is largely unregulated. There is no centralized exchange guaranteeing the risk free execution of trade. When any trader enters into trading, they also need to be cognizant of the risks that they are facing.
Forex markets in turn provide the maximum leverage. Leveraging implies the risks and a ratio of 20 to 30 times, implying a lot of risk. Also the fact that there is no limit to the movement that happens in the forex market in a given day, it is also possible for a person to lose all of the investments in minutes if they place high leveraged bets.
The forex trading operations are usually difficult to manage operationally. It is because the market works all the time whereas humans don’t. The traders also have a resort to the algorithms to help protect the value of the investments when they are away. Also, multinational firms also have trading desks that are spread all over the world. Thus, they can only be done if the trading is conducted on a large scale.
As a result, it is clear that if a person doesn’t have the capital or doesn’t know how to manage their positions when they are away, then this market could cause significant losses in the nights or the weekends.
India is not the only nation to restrict Forex Trading. Trading on pairs different from RBI is illegal, as mentioned under the FEMA act. Trading by an online broker is a non-bailable offense in India. With the presence of many online brokers, forex investors are misguided. RBI claims that these restrictions are there to prevent traders from losing big time. Still, many Indian citizens believe that the main reason is to stop the overflow of currency in the country.