Forex Trading in India – Regulations Tips and Tricks
Regarding Forex trading in India, for decades, India has maintained a complex foreign currency trading policy. Since World War II, India has struggled to maintain sufficient foreign exchange reserves.
India has adopted several draconian capital control measures to limit how Indian residents can spend their money abroad to correct the inadequate foreign exchange reserves. Despite many reforms and liberalization efforts, the remnants of these strict policies have crept into the lives of everyday traders and investors.
Within the following lines, we will round up several aspects of Forex trading in India. Then, and with the primary focus on currency trading policy, we tackle the process of how to start Forex trading in India.
Forex Trading in India – India’s Strict Currency Trading Policy
Foreign exchange reserves play a vital role in maintaining the stability of a country’s sovereign currency, especially if it is an emerging economy, which India still is.
It’s important to know the US has removed India from its internal list of developing countries.
However, India remains a developing country, according to the latest update of the International Monetary Fund’s World Economic Outlook from January 2021.
Being seen as an emerging market or developing economy amplifies the importance of safeguarding a national currency with foreign reserves with greater stability in the international community, such as the US Dollar, Euro, Pound Sterling.
As of January 29, 2021, India has the fourth largest foreign exchange reserve, exceeding the US $590 billion.
Foreign exchange reserves in India are also important to facilitate cross-border trade. Moreover, India was the 16th largest exporter in 2018, exporting the US $326 billion in total merchandise value.
The United States was India’s main export partner. When India exports goods, it collects foreign currency if the overseas counterpart pays for the goods in US dollars or another currency or if the counterparty exchanges foreign currency for Indian rupees.
Exporting is an excellent method for acquiring foreign currency. The problem with this is that India is a net importer, which means the country imports more than it exports.
Therefore, India needs more foreign exchange than it receives.
India is not only concerned with getting money out of the country. If too much foreign capital enters the country unchecked, it can lead to inflation.
India has been grappling with high inflation rates for years. In 2020, India’s inflation rate 2020 was estimated at 4.95%.
Due to this complex mix of circumstances, there is a rigorous financial institution approach to Forex trading in India.
Regulation of Forex Trading in India
Foreign exchange trading is highly regulated and supervised for many critical economic reasons.
Forex is subject to the Foreign Exchange Management Act 1999 (FEMA) imposed by the Reserve Bank of India (RBI).
The Act is defined as “An Act to consolidate and amend the Foreign Exchange Act to facilitate foreign trade and payments and promote the orderly development and maintenance of the foreign exchange market in India.”
Before FEMA in 1999, there was a series of much stricter predecessors to this law. For example, currency trading controls were first adopted in 1939 when India was under British rule.
When World War II started, the government introduced the India Defense Act of 1939, which essentially declared martial law.
The law gave the central government the power to control the use, disposal, or transactions of securities, or currencies, among other things.
In 1947, following the conclusion of World War II, India introduced the Foreign Exchange Regulation Act (FERA).
The Act was originally intended to be temporary. However, ten years later, the law has become a permanent part of the law.
Later, FERA, 1974 came into force, leading to even harsher constraints. Violation of regulations regarding Forex trading in India was a serious crime giving the state the power to arrest citizens without a warrant or evidence.
Despite decades of liberalization of forex regulation in India, the country remains one of the most inhospitable places in the world to trade currencies and conduct foreign currency transactions.
In collaboration with the Reserve Bank of India, the Securities and Exchange Board of India (SEBI) regulates the country’s capital markets sector, including futures and options trading in a limited number of trading pairs.
Is Forex Trading Legal in India?
Forex trading in India is legal but subject to restrictive conditions. So how to start Forex trading in India as an individual forex trader?
The only place to speculate in the Indian financial markets while being confident that you are not violating one of the country’s many currency control laws is to trade with a regulated stock exchange.
The regulated exchanges offering forex derivatives are the National Stock Exchange of India, the Bombay Stock Exchange, and others.
In India, these are the currency pairs Forex traders can legally trade in the form of futures or options:
Brokers in India
Today, if you trade Forex in India, foreign currency trading involves currency derivatives contracts and currency futures trading. Currency futures contracts are part of the service of exchanges such as NSE, Bombay Stock Exchange (BSE), MCX-SX. In addition, the central bank of India may authorize certain persons and companies to trade or transfer foreign currency or securities.
It is possible to trade futures and currency options in India by using a brokerage service. But trading instruments are often less competitive than what international brokers offer, such as spot-forex and CFDs.
Many international forex trading platforms, mainly regulated offshore companies, are ready to open accounts for residents and nationals of India.
But the tricky part is that once you have opened the trading account, you might encounter challenges sending money overseas to a forex broker’s account. For example, if your Indian bank notices you are trying to transfer money overseas, they may refuse the transfer.
If you are using a money transfer service, the broker may treat it as a third-party transfer and return the deposit.
According to international anti-money laundering rules, brokers can only allow clients to fund their accounts from their own accounts.
In Indian exchanges, the currency derivatives enable trading using derivative instruments such as currency futures & options.
If you are based in India, make sure you understand the currency trading rules, which are far-reaching.
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