What Do We Know About The Legality of Forex Trading in India?
Ask any traders in India about the legality of Forex trading, chances are they will tell you it is illegal. Even professional traders who are based in India don’t really have a full understanding of the law here, and to play it safe they usually avoid trading forex all together or stay under the radar. We have spent… Read More »
Ask any traders in India about the legality of Forex trading, chances are they will tell you it is illegal. Even professional traders who are based in India don’t really have a full understanding of the law here, and to play it safe they usually avoid trading forex all together or stay under the radar.
We have spent quite a bit of time researching the topic, from Quora to investing publications and the answers we have gotten were quite mix and confusing. In part, some articles are dated and there have been quite a number of changes on FEMA (Foreign Exchange Management Act) over the past recent years.
In this article, we will cover several points that have generally been known to be true and consistent.
Spot Forex Trading Is Banned by RBI
Spot Forex trading is not legal in India, and all the information you read online referencing to forex trading and 7 legal currencies pairs which will be covered below are solely referring to derivative instruments. They are not the same thing.
Spot forex refers to trading underlying physical currencies which involve having actual ownership of the currencies. Compared to derivative instruments like futures and options, spot forex affects the valuation of the national currencies and has a national-wide effect when it is subject to risky speculation.
Forex futures and options are an important instrument because it allows the big cooperation to hedge their currencies risk when their business dealing involves parties from other parts of the world. It is not meant for day traders to make money online.
7 Legal Currencies Pairs
First, trading currencies are legal only if they belong to one of these currencies pairs. The first four were the exceptions to the restrictions of Foreign Exchange Management Act, 1999 put out by RBI.
Back to the period Reserve Bank of India (RBI) has put out strict restrictions on forex trading because the forex reserves were low in the country, and since people are funding the margin through Indian banks. It created massive stress on the banks balance sheet, and ultimately its foreign reserve.
By December 2015, RBI loosen its policy and allowed 3 cross-currency futures and options to be traded on the exchange. Those cross-currencies pairs are:
4 Legal Indian Exchanges
This may come as a surprise to you, but at present, all currencies trading (except through money changers aka sport FX) have to be carried out on national stock exchanges, and the 3 main exchanges are: National Stock Exchange of India (NSE), Bombay Stock Exchange (BSE), and Metropolitan Stock Exchange (MCX-SX).
You can trade them through SEBI approved brokers such as Zerodha, Motilal Oswal, Upstox, and they will link you up to one of the three exchanges.
International Brokers Are Not Allowed
How about offshore brokers which allow you to trade spot forex and even CFD? The short answer is they are not governed by SIBEI or whatever financial institution as they are outside of the jurisdiction of India. But as an Indian nationality, you are not allowed to open an account and trade.
Those offshore brokerage websites are easily accessible by anyone located in India, and to open an account is just a matter of a few clicks and days or even hours of waiting. The question then is, whether it is enforceable by the Indian authority? The answers we got online are they are not. The laws and regulations set out by SEBI are targeting banks and financial institutions at large, and not towards individuals.
Individuals who wish to engage in forex trading through an international broker are still taking a risk, although a small one. But law being law. What we have laid out the factual and you decide what is best for you.