Discover how you can generate wealth and build for your financial future by trading forex in India.
Forex is a common abbreviation for foreign exchange, and forex trading refers to investors trading in the foreign exchange market. The primary objective of forex trading is to make a profit by exchanging one currency for another at an agreed price, for example exchanging Australian Dollars for US Dollars. Forex is the world’s most traded market but it does carry some risk. With this in mind, forex trading is much better suited to experienced investors than new traders.
In India, the Reserve Bank of India (RBI) strictly regulates forex trading. According to RBI circular No. 53 dated April 7 2011 and circular No. 46 dated 17 September 2013, overseas forex trading by Indian residents through digital trading portals, using credit cards or net banking, is strictly prohibited. Transferring money to a forex trading account with a broker outside India is a violation of the Foreign Exchange Management Act (FEMA), 1999 and may lead to legal action.
But this does not mean that Indian residents cannot trade in currency markets. There are a few legal ways to trade forex in India since Indian exchanges like the National Stock Exchange (NSE), the Bombay Stock Exchange (BSE) and the Metropolitan Stock Exchange (MSEI) provide an opportunity for individuals to trade in currency derivatives.
Indian law permits forex trading only in currency derivatives. RBI and SEBI have set up the framework to carry out such trading while FEMA (Foreign Exchange Management Act) provides the legal guidelines to trade in currency derivatives in India.
Here are some salient points to be aware of:
- SInce 2008, RBI and SEBI have permitted currency derivatives trading to be carried out on three stock exchanges – the NSE, the BSE and the MSEI.
- In the beginning trading in USDINR futures was permitted; subsequently trading in other currency pairs were permitted. Currently its possible to trade in derivatives of USD, GBP, Euro as well as the Japanese Yen (JPY).
- Currency options trading is possible using the US Dollar / Indian Rupees (USDINR) spot rate.
- Since currency derivatives trading is carried out on margin, customers need to deposit the initial margin amount, through their financial intermediary, with the exchange.
- Contracts are settled only in INR and the exchange guarantees the settlement.
- Options have a cycle range of 3 months and futures from 1- to 12- months.
- Lot size for futures trading is 1000 per unit with the exception of the JPY/INR pair where it is 1,00,000 units.
Currency derivatives are efficient instruments for risk management. The benefits of trading in currency derivatives are:
- Hedging: Businessmen can use currency derivatives to protect their foreign exchange exposure. They can hedge potential business losses by taking relevant positions. Importers who have to make USD payments in the future can hedge their foreign exchange exposure by fixing their pay out rate. They can do this by buying USDINR at today’s rate if they think that USDINR is likely to depreciate in the future.
- Speculation: Traders can speculate on market movements by using currency futures. So, if you are of the view that oil prices would rise and adversely impact the Indian import bill, you can buy USDINR with the assumption that there would be a depreciation in INR in the short to medium term.
- Arbitrage: Traders can make substantial profits by arbitraging on currency exchange rates in different exchanges and markets.
As of now, Indian investors can carry out currency derivatives trading on 3 exchanges. These are
- The NSE
- The BSE
You’ll need to sign up with a registered Indian broker who can carry out trading in currency derivatives on one of these exchanges. A list of Indian registered brokers who allow trading in currency derivatives segment is available on the Securities and Exchange Board of India’s (SEBI) website.
Just like with any other form of investment, you need to make yourself fully aware of the fees and charges that apply before you begin trading in currency derivatives. To start with, compare the margin you will be required to meet in order to make a trade with a range of brokers. This could be 3%, 5% or some other figure, and this will affect the amount of money you will have to spend to buy or sell currency derivatives. For example, if your account has a margin of 5%, a trade worth INR 1,00,000 will require you to spend INR 5,000. In addition, brokers will charge a commission for every trade you make. Sample brokerage is INR 20 per executed order or 0.02% of gross turnover whichever is lower.
Certain taxes and duties (such as GST, stamp duty, SEBI turnover charges) are also levied as per law.
Most brokers will typically allow you to apply for an account within minutes online. While the application process varies between brokers, you will usually have to fill out an online application and then await a response from the broker to learn whether or not your application has been approved.
You will usually have to supply:
- Your name
- Your date of birth
- Your contact details
- Proof of address
- Proof of ID, for example your driver’s licence or passport
Just like with any other form of investment, there are several strategies you can consider when trading currency derivatives ranging from the basic right through to quite complex approaches. One strategy traders can use is to perform technical analysis or fundamental analysis to try and accurately predict the future performance of currency pairs.
Another common strategy is known as the day trading strategy, and it is based on the simple premise that you do not hold any forex positions overnight. Because the longer you hold open a position the greater risk of you suffering a loss, traders can close all the positions they hold before the end of the trading day and therefore minimise risk.
A third common strategy is support and resistance levels. This involves researching the past fluctuations of a currency and using them to predict future price movements. The previous upper limit of a price is its resistance limit and the previous lower limit is its support limit. This can help traders make an educated guess as to when a currency’s value may rise or fall.
Before you start trading currency derivatives you should make sure that you are well aware of all the risks involved with this sort of trading. These include:
- Even though you only have to pay a small percentage of the value of your trade upfront, you are still responsible for the entire amount.
- Foreign exchange rates are volatile and can quickly move against you, causing you to lose a significant amount of money.
- As markets are open 24 hours a day, you may need to devote plenty of time to tracking any open positions.
- Predicting currency markets is quite difficult as they can be affected by a wide range of factors.
- Even stop loss orders which are designed to minimise your losses can only offer limited protection against the risks involved.
- Ask price. This is the lowest price at which a trader can buy a currency.
- At best. This is an instruction given to a broker to purchase or sell a currency at the best rate currently available in the market.
- Base currency. This is the first currency listed in a currency pair. It shows the value of one currency when measured against another, for example USDINR.
- Bear market. A bear market situation is when prices sharply decline.
- Bid price. This is the price at which an investor can sell a currency derivative.
- Bull market. This is a market where prices are rising.
- Hedging. This involves opening a new position in opposition to an already open position in order to protect against exchange rate fluctuations.
- Leverage. Leverage refers to a trader’s ability to control a large amount of money in the foreign exchange markets after only having to invest a small percentage of the overall value of a trade.
- Margin. The amount you are required to spend to open a trade.
- Margin call. This is a warning message when your trading account does not hold sufficient funds to maintain all the positions you have open.