Forex Trading in India: How to Trade, Rules, Regulations, Risks and Punishment for Non-Compliance

This post was most recently updated on December 3rd, 2023

Forex trading is the act of buying and selling currencies in the global foreign exchange market. The forex market is the largest and most liquid financial market in the world, with an average daily turnover of over $6 trillion. Forex trading can be done for various purposes, such as hedging, speculation, arbitrage, or diversification.

In this blog post, we will cover everything you need to know about Forex trading in India including How to Trade, RBI Approved Forex Trading Apps, Rules and Regulations, Risks and Punishment for Non-Compliance.

Consider reading: Best Copy Trading Platforms

Overview Forex Trading in India

Forex trading in India is legal, but with some restrictions. According to the Reserve Bank of India (RBI), Indian residents can trade forex in the following ways:

1. Trading with Indian Rupee: Indians can trade currency pairs that include the Indian Rupee (INR). This is done through registered brokers on recognized stock exchanges like the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), or Metropolitan Stock Exchange (MSE).
2. Cross-Currency Trading: Trading of cross-currency pairs (excluding the INR) is permitted. However, this must also be done through a registered Indian broker and only within designated hours – from 9:00 AM to 7:30 PM IST.
3. Offshore Trading through LRS: Trading with offshore brokers is possible via a Liberalized Remittance Scheme (LRS) account. This scheme allows Indian residents to remit up to $250,000 per financial year for permissible transactions.

It’s crucial for traders to be aware that the RBI keeps a vigilant eye on unauthorized Forex trading platforms. They maintain a list of blacklisted or banned platforms, apps, and websites. Engaging with these platforms could result in legal complications or exposure to fraud and scams.

Consider reading: Best Trading Apps in India

Important Forex Trading Terms

Before you start forex trading in India, you need to familiarize yourself with some basic forex trading terms and concepts. Here are some of the most important ones:

• Currency pair: A currency pair is a combination of two currencies that are traded against each other. For example, EUR/USD is a currency pair that represents the exchange rate between the euro and the US dollar.
• Base currency and quote currency: The base currency is the first currency in a currency pair, while the quote currency is the second currency. For example, in EUR/USD, EUR is the base currency and USD is the quote currency. The exchange rate of a currency pair tells you how much of the quote currency you need to buy one unit of the base currency.
• Bid and ask price: The bid price is the price at which you can sell the base currency, while the ask price is the price at which you can buy the base currency. The difference between the bid and ask price is called the spread, which is the cost of trading.
• Pip: A pip is a unit of measurement for the change in value of a currency pair. It is usually the fourth decimal place in most currency pairs, except for those involving the Japanese yen, where it is the second decimal place. For example, if EUR/USD moves from 1.1850 to 1.1855, it has moved 5 pips.
• Lot: A lot is a standard unit of size for a forex trade. One standard lot is equivalent to 100,000 units of the base currency. There are also smaller lots, such as mini lots (10,000 units), micro lots (1,000 units), and nano lots (100 units).
• Leverage: Leverage is a tool that allows you to trade with more money than you have in your account. It is expressed as a ratio, such as 50:1, which means that you can trade with $50 for every $1 in your account. Leverage can amplify your profits, but also your losses.
• Margin: Margin is the amount of money that you need to deposit in your account to open and maintain a leveraged trade. It is calculated as a percentage of the total value of your trade. For example, if you want to trade one standard lot of EUR/USD at 50:1 leverage, and the current exchange rate is 1.1850, you need to deposit $2,370 as margin ($100,000 x 1.1850 / 50 = $2,370).
• Profit and loss: Profit and loss (P&L) is the amount of money that you make or lose from your forex trade. It is calculated by multiplying the number of pips that the currency pair has moved by the value of each pip. For example, if you buy one standard lot of EUR/USD at 1.1850 and sell it at 1.1900, you make a profit of $500 (50 pips x $10 per pip).

How to Trade Forex in India

Forex trading in India can be a lucrative venture if approached with due diligence and awareness of regulations. To begin trading, follow these essential steps:

1. Select a Regulated Broker: Start by choosing a forex broker that is regulated and reputable. Ensure they offer the currency pairs, trading platforms, and tools that align with your trading goals. Utilize resources like a curated list of top forex brokers in India for guidance.
2. Open and Verify a Trading Account: Register for a trading account with your chosen broker. This process will typically require you to verify your identity and address, and possibly furnish proof of income and source of funds, as per the broker’s requirements.
3. Fund Your Account: Deposit funds into your trading account using an appropriate payment method. For trading with offshore brokers, you’ll need an LRS account, adhering to the RBI’s limits and regulations.
4. Market Analysis and Strategy Development: Choose your desired currency pair and conduct thorough market analysis. Utilize technical and fundamental analysis tools, indicators, charts, and stay updated with relevant news to inform your decisions.
5. Trading Execution: Decide on buying or selling based on your market analysis and strategy. Employ various order types like market orders, limit orders, stop orders, and trailing stops to manage your trades and risk effectively.
6. Trade Management and Closure: Monitor your open positions, closing them when your profit targets or stop-loss levels are reached. You can also adjust or cancel your trade if required before its closure.
7. Withdraw Profits and Tax Compliance: Withdraw your earnings using a preferred payment method. Remember, your forex income may be subject to taxes depending on your tax residency and status.

Consider reading: Best RBI Approved Forex Trading Apps in India

Advantages of Forex Trading

Forex trading in India offers many advantages for traders, such as:

• Accessibility: You can trade forex anytime and anywhere, as long as you have an internet connection and a device that supports a trading platform. The forex market is open 24 hours a day, five days a week, from Monday to Friday.
• Liquidity: You can easily enter and exit the market, as there are always buyers and sellers available for any currency pair. The high liquidity of the forex market also means that you can enjoy low spreads and fast execution speeds.
• Diversity: You can trade a wide range of currency pairs, from major pairs (such as EUR/USD, USD/JPY, GBP/USD) to minor pairs (such as EUR/GBP, AUD/NZD, CAD/CHF) to exotic pairs (such as USD/INR, EUR/TRY, GBP/ZAR). You can also trade different types of forex products, such as spot forex, futures, options, swaps, and contracts for difference (CFDs).
• Opportunity: You can profit from both rising and falling markets, as you can buy or sell any currency pair depending on your market view. You can also use leverage to increase your trading capital and potential returns.
• Flexibility: You can customize your trading style, strategy, and risk appetite according to your goals and preferences. You can also use various tools and techniques to enhance your trading performance and experience.

Rules and Regulations for Forex Trading in India

Forex trading, the exchange of one currency for another, is subject to strict regulation in India, overseen by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). Their aim is to maintain the integrity of the Indian Rupee (INR) and to prevent illicit activities like money laundering and fraud.

Below are the essential rules and guidelines that Indian forex traders must adhere to for legal and ethical trading:

1. Legal Forex Trading through Licensed Brokers: Forex trading in India is permissible only when conducted through brokers registered and licensed under the Foreign Exchange Management Act (FEMA) 1999. This ensures adherence to the legal framework governing forex trading.
2. Permitted Currency Pairs: As per FEMA regulations, Indian forex traders are limited to trading in four INR-involving currency pairs: USD/INR, EUR/INR, GBP/INR, and JPY/INR. Additionally, three cross-currency pairs are allowed: EUR/USD, GBP/USD, and USD/JPY. Trading in other currency pairs or on unauthorized platforms offering CFDs (Contracts for Difference) or binary options is illegal.
3. Penalties for Non-Compliance: Violations of FEMA guidelines can lead to severe consequences. As per Section 13 of FEMA, penalties can range from a daily fine of Rs. 10,000 during the violation period to imprisonment for up to 10 years, with fines potentially tripling the amount involved in the violation. RBI and SEBI are authorized to investigate and prosecute illegal forex trading activities.
4. Tax Obligations and Declarations: Forex trading profits in India are subject to income tax according to individual tax slabs. Traders are also responsible for GST, stamp duty, brokerage fees, and SEBI charges. It is imperative for traders to declare their gains as business income, as forex trading is considered non-speculative.
5. Choosing Brokers and Avoiding Fraudulent Schemes: Traders must diligently check the registration and licensing of brokers and trading platforms. It is crucial to steer clear of any schemes promising unrealistic returns or minimal risks, as these could be fraudulent or illegal.

Forex trading in India offers profitable opportunities, but it is essential to engage in it within the legal and ethical framework set by the authorities.

Punishment for Forex Trading in India

Forex trading, the process of exchanging one currency for another, is regulated in India by the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI). Their role is to safeguard the Indian Rupee (INR) and prevent fraudulent activities.

Legal Framework: In India, Forex trading is governed by the Foreign Exchange Management Act (FEMA) 1999. Legal trading is confined to registered and licensed brokers who adhere to FEMA’s stipulations.

Permitted Currency Pairs: Indian traders are allowed to engage in forex trades involving the INR and three cross-currency pairs. The permissible pairs are USD/INR, EUR/INR, GBP/INR, JPY/INR, EUR/USD, GBP/USD, and USD/JPY. Trading in any other currency pairs or on unauthorized platforms offering Contracts for Difference (CFDs) or binary options is prohibited.

Penalties for Violations: Non-compliance with FEMA rules can lead to severe repercussions. As per Section 13 of FEMA, penalties can range from a daily fine of Rs. 10,000 during the violation period to imprisonment for up to 10 years. Fines may also amount to thrice the sum involved in the violation.

Precautions for Traders: Forex traders in India must exercise due diligence in selecting trading platforms and currency pairs. Verifying the broker’s registration and license is essential before account creation or trading. It’s also prudent to steer clear of schemes promising unrealistic returns or minimal risks, as these might be fraudulent or illegal.

Ethical and Legal Trading: While Forex trading can be profitable, it is imperative to engage in it legally and ethically, respecting the regulations set by RBI and SEBI.

Risks Associated With Forex Trading in India

Forex trading in India also involves some risks that you need to be aware of and manage properly, such as:

• Market risk: The forex market is influenced by various factors, such as economic data, political events, central bank policies, market sentiment, and natural disasters. These factors can cause sudden and unpredictable price movements that may go against your expectations and positions.
• Leverage risk: While leverage can magnify your profits, it can also magnify your losses. If the market moves against your position, you may lose more than your initial margin deposit and face a margin call from your broker. A margin call is a request from your broker to deposit more funds into your account to maintain your open position or close it at a loss.
• Broker risk: Not all forex brokers are regulated and reputable. Some brokers may engage in fraudulent or unethical practices, such as manipulating prices, widening spreads, rejecting orders, or delaying withdrawals. Therefore, it is crucial to choose a broker that is licensed by a reputable authority and offers adequate protection to your funds.
• Operational risk: Forex trading involves various operational aspects, such as internet connection, device compatibility, platform functionality, order execution speed, etc. These aspects may encounter technical issues or errors that may affect your trading performance and experience.

Most Traded Forex Currencies in the World

Here are the most traded forex currencies in the world in 2023, according to the Bank for International Settlements (BIS):

The table shows the percentage share of each currency in the total average daily turnover of the forex market, which was $6.6 trillion in 2023. The table also shows the ISO code of each currency, which is a three-letter abbreviation that is used to identify the currency in the forex market.

As you can see, the US dollar is the dominant currency in the forex market, accounting for almost 90% of all transactions. The euro and the Japanese yen are the second and third most traded currencies, respectively, followed by the British pound and the Australian dollar.

The Swiss franc, the Canadian dollar, and the Chinese yuan are also among the top ten most traded currencies, while the Swedish krona and the New Zealand dollar are the least traded currencies in the table.

Consider reading: India Forex Reserves

Final Thoughts on Forex Trading in India

Forex trading in India is a lucrative and exciting activity that can offer many benefits for traders who are willing to learn and master it. However, forex trading also involves significant risks that require careful management and mitigation.

To trade forex successfully in India, you need to choose a regulated and reliable broker that offers you access to a variety of currency pairs, platforms, tools, and services. You also need to develop a solid trading strategy that suits your goals and preferences.

You also need to keep yourself updated with the latest market news and trends that may affect your trading decisions.

We hope that this blog post has given you a comprehensive overview of forex trading in India and helped you understand its basics, advantages, risks, and most traded currencies.

If you have any questions or feedback, please feel free to leave a comment below or contact us directly. Happy trading!

FAQs on Forex Trading in India

Is forex trading Legal in India?

Yes, forex trading is legal in India. However, it is important to follow authorized brokers and permitted currency pairs to avoid penalties under FEMA. If you want to diversify your portfolio through online forex trading, ensure that you check the credentials of the broker.

Does Zerodha allow forex trading in India?

Yes, Zerodha allows forex trading. You can open an instant account with Zerodha to start trading forex today. Zerodha offers currency derivatives trading at BSE and NSE exchanges. Before beginning, customers need to activate the Currency trading segment in their Zerodha trading account.

Which company is best for forex trading in India?

Determining the best forex trading company in India can be subjective, but Saxo Bank is often considered a top choice due to its wide range of currency pairs. Fusion Markets is known for offering low commissions, while IC Markets boasts low FX commissions and tight spreads. Global Prime is favored for its low forex fees, and Tickmill offers low FX commissions and tight spreads.