Last Updated: May 30, 2020
Forex trading has become one of the most popular forms of trading thanks to its highly dynamic nature and liquidity. Before 2015, forex trading in India had numerous restrictions imposed on it but in the current year, those restrictions are not that severe.
Those who are confused about the legality of forex trading in India are encouraged to read on and find out more about it in great detail and clear any doubts they have.
Before that, let us try to understand what forex trading is.
The word Forex is the combination of two words- foreign & exchange. Forex trading refers to the trading of currency pairs on the Foreign exchange market by traders all over the world. Some people may also call it fx trade.
In forex trading, currency pairs are selected and converted into one another for numerous reasons such as commerce, trade, or tourism. The most famous currency pair in the world is the EUR/USD pair.
Forex trading has become very easy thanks to the internet. Before that, only multinational organizations and hedge funds were able to trade currencies.
These days almost anyone can start forex trading. The foreign exchange market is so dynamic and highly liquid that it runs trades worth 5 trillion-dollars in all currencies daily.
Some currencies are known to be highly volatile due to several factors such as inflation and wars. One such example of a volatile currency is the Iranian rial.
On the other hand, some currencies are stable due to good economical conditions of the country in which they are issued in such as the Swiss franc of Switzerland.
Traders are often known to invest in currency pairs that are volatile such as the AUD/USD to make quick earnings by going short on their investment.
Similarly, traders also go for good forex pairs for their stable nature in the long run on the financial market.
The main question that everyone has been asking about forex trading in India is whether it's legal or not. The simple answer to that question is yes. You can trade forex legally from any part of the country.
Forex trading has become an integral part of the lives of many Indian traders who make use of this platform to earn good money. However, it should be noted that there are some limitations to retail forex trading in India.
In detail, that means that you can only trade in Indian exchanges and their forex instruments. The limitations to these instruments are that they only offer currency pairs that are-
Additionally, trading of any non-INR pair, i.e any pairing that does not have the Indian rupee is illegal under the Foreign Exchange Management Act of the Indian law.
Those found guilty under this Act can face imprisonment and be fined. However, there are no such restrictions or penalties on Non-Resident Indians (NRIs) if they participate in foreign exchange trading while they are in the country.
As a citizen of India who wishes to participate in Forex trading, you are only allowed to trade via specific Indian brokerages that are recognized and have the authority to allow exchanges that are Indian based such as BSE, NSE, MCX, etc.
Indian citizens have the option to open accounts with many International forex brokers. These brokers also try to educate people about forex trading by opening education centers or providing online study materials on the subject.
Even though markets such as the foreign exchange market are designed and advertised to be completely decentralized, they still have to adhere to the laws of every country in the world.
Forex trading used to be a lot more difficult in India a few years back but the RBI (Reserve Bank of India) eased up on the rules a little which allowed forex trading to flourish among eager Indian traders as they are now allowed trade in major currency pairs legally.
Different countries have different mindsets and rules and they govern themselves accordingly. In India’s case, the reason for not allowing traders to trade in non-Indian currency pairs is due to the effects it can have on the foreign currency reserves of the country.
When traders lose out on a trade, they’d have to buy USD from the Reserve Bank of India which will consequently increase the current account deficit and the RBI does not want that as they are currently aiming to keep Indian forex reserves their main priority.
India is not alone in restricting forex trading in their home soil. Roughly twenty countries around the world have also put many restrictions on forex trading for a variety of reasons.
In India, you are not allowed to forex trade with country currencies such as Burma, Bulgaria, China, Cuba, Iran, Indonesia, Malaysia, Myanmar, North Korea, South Korea, Pakistan, Syria, Ukraine, and last but not least, Zimbabwe.
Most of these countries also have their own sets of rules, regulations, and restrictions that have to be followed by their citizens or they might face legal ramifications.
Forex trading in India used to be heavily restricted. Although the government has eased up on its restrictions in the last 5 years, India still has a long way to go as traders are still not allowed to trade in non-Indian currency pairs on the foreign exchange market.
If a person is found to be trading in pairs that are not defined by the Reserve Bank of India then they can be tried and put into prison under the FEMA Act so be careful while undertaking forex trades and ensure that the currency pair you have chosen is legal.
Lastly, India is a country that is undergoing constant financial reforms and changes so it is safe to say that the remaining restrictions on the forex market could be lifted In the upcoming years.