Currency Trading in India

More On Currency Trading

Foreign exchange is the largest market in the world where all the currencies of the world are traded. As far as Currency trading in India is concerned, there are certain doubts about its legality and a lack of awareness about rules pertaining to the currency market. The short answer to the question if currency trading is legal in India or not is YES.

This needs to be known that it is highly liquid in most parts of the world. 

Currency trading in India is legal but only within predetermined ranges decided by the Reserve Bank of India (RBI) and Securities Exchange Board of India (SEBI). So, if one wants to start forex trading in India, there are certain regulations that must be fulfilled under every circumstance.

This is because the failure of compliance with the guidelines is an offense and may lead to a non-bailable sentence in prison under The Foreign Exchange Management Act, 1999.

Currency Trading in India Basics

There are many participants of currency trading in India like banks for regulatory purposes, companies for managing risk on the purchase and sell orders, travelers for expenses incurred in traveling in different countries, and traders for speculative purposes. Currency is always traded in pairs. For example USD – INR, GBP – INR, etc.

There is a standard format in which currency pairs are mentioned for trading:

Base Currency / Quotation Currency = Value

Base currency is fixed to 1 unit of currency like 1 USD, 1 Indian Rupee, 1 Euro, etc.

Quotation Currency refers to the other currency which equates to the base currency.

Value refers to the value of quotation currency against the base currency

For example, GBP/INR = 89.75 means that 1 unit of the base currency, that is GBP in this example is equal to 89.75 units of the quotation currency, that is INR.

A majority of the Forex brokers in India allow their customers only to trade in INR-related currency pairs.

For these trades, the different forex trading brokerage houses levy different kinds of charges as well. Make sure you are aware of those fees while you have a conversation with any of such stockbrokers.

Currency Trading in India Example

Let’s move ahead and try to understand the concept of Currency trading in India with the help of an example. For instance, USD is trading at ₹70 valuations.

You believe that the RBI (Reserve Bank of India) is going to decrease the interest rates. This will directly impact the Indian currency value and further lower its valuation.

Based on this objective idea, you choose to buy 1000 units of INR-USD pair (currently priced at ₹70). In the next 3 days, the USD is placed at ₹73. Thus, due to this specific factor, you were able to make a profit of ₹3000.

Similarly, let’s assume that in the latest financial year, the Government of India posts a lowered inflation rate. This will appreciate the value of the Indian Rupee and there is a possibility of its value going down to let’s say, an exchange rate of ₹69. You could have shorted the trade at ₹73 with 1000 such units and again made a profit of ₹4000.

Currency trading in India is good for the Indian economy if you look at the overall volume turnover, the size of trading, and corresponding frequency.

Before we jump and talk about the rules, let’s have a quick look at some of the facts around Currency Trading in India:

  • The trading hours for currency are from 9 am to 5 pm on weekdays.
  • There is no need to open any Demat Account for currency trading. A trading account is good enough!
  • Currency trading is only allowed at Derivative level.
  • Delivery trading in currency is NOT allowed.

Currency Trading in India Factors

Here is a quick look at some of the factors that impact the value of Indian Currency directly or indirectly in the overall Currency trading exchange system:

  • Inflation: Lower Inflation, ₹ Appreciates
  • Interest Rate: Increased Interest, ₹ Appreciates
  • Current Account Deficit: Lower deficit, ₹ Appreciates
  • Public Debts: Lower Debts, ₹ Appreciates
  • Terms of Trade: Positive Trade Balance: ₹ Appreciates
  • Political Stability: Stable government, ₹ Appreciates
  • Exports: Increased Exports, ₹ Appreciates
  • RBI Selling off USD: ₹ Appreciates

Currency Trading in India Rules

Now, let us go through some of the rules of the regulatory framework set up by the SEBI and the Reserve Bank of India, with the Foreign Exchange Management Act for currency trading in India.

  • Currency trading in India is legal only with SEBI-approved and registered brokers. Trading in currency derivatives is permitted only on the exchanges recognized by the RBI and SEBI since 2008. Currently, there are three recognized exchanges in India – The National Stock Exchange (NSE), the Metropolitan Stock Exchange of India (MSE), and the United Stock Exchange (USE).
  • Originally, the only allowed currency pair for futures trading was INR/USD. Later, more pairs were introduced for trading. Currently, trading in derivatives of Dollars, Great British Pound, Euro, and Japanese Yen is allowed in India.
  • Currency options are available for trading with underlying as USD/INR spot rate
  • The lot size for futures is 1000 per unit (for Dollars, Great British Pound, Euro) except for the JPY/INR pair where the lot size is 100000 units
  • The cycle of futures is ranging from 1 month to 12 months while for options, it is 3 months
  • All contracts need to be settled only in cash and that too in Indian Rupee
  • For currency trading in India, there is an initial margin that needs to be deposited with the exchange through a financial intermediary as derivatives are traded on margins. The margin is generally 5% of the contract value. However, the margin can be changed by the bank depending on market volatility
  • Although currency trading is legal with registered brokers but trading with an international broker and depositing money from an Indian account to an overseas account without the Indian authorities’ consent is strictly against the law.

How Currency Trading Works?

Now let us understand how trade can be entered into in the currency market and how currency trading in India works.

Suppose the spot price for USD/ INR is 67.5. A trader anticipates that the USD will appreciate further with respect to INR and therefore, takes his position on 10 lots of the currency pair accordingly. Now let us see how much money would he make per pip in this currency pair.

Profit per pip = Lot size * Pip

= 1000 * 0.0025

= 2.5

Therefore, for every pip or tick movement, the trader will earn ₹2.5.

Now, suppose the price of the currency pair rises to 67.59. Total number of points that rose = 67.59 – 67.50 = 0.09

Number of pips that the currency has moved = Number of points/pip size

= 0.09 / 0.0025

= 36

So, the Profit made by the trader = Lot size * number of lots * number of pips * tick size

= 1000 * 10 * 36 * 0.0025

= 900

Thus, we see that a profit of ₹900 is made by the trader in a single day when the value of the currency pair moved from 67.5 to 67.59.

If the price of the currency does not move in the anticipated direction, the trader can carry this trade forward till expiry, provided he manages to deposit the required margin amount.

Currency Trading in India Cautions

In India, forex brokers need to be regulated by the SEBI. Most international brokers in India operate through branch offices or through affiliates that are not under the regulation of SEBI. Many traders have lost a lot of money due to a lack of awareness and fraudulent activities from their brokers’ parts.

So, although currency trading in India is legal it is highly recommended to trade only through government-approved SEBI Forex brokers.

If a broker is offering its customers to trade in currency pairs that do not include INR, then, make sure to check the legal status of the broker and whether their services are in compliance with the regulatory guidelines established by the SEBI and RBI.

Currency Trading in India – Important Terms

Here are a few specific terms related to currency trading in India:

Spot Price and Futures PriceSpot price is the price at which a currency pair is currently trading in the market. The futures price is the price at which a futures contract trades in the market.

Lot Size – Currency trading is done in lots and the lot size has been fixed for different pairs. For USD/ INR, GBP/ INR, EUR/ INR, it is 1000 and for JPY/ INR, it is 10000.

Contract Cycles – There are different expiry cycles for futures contracts of currencies like one month, two months, three months up to the twelfth month.

Expiry Date – the Expiry date of a futures contract is specified in it. It is the last working day (excluding Saturdays) of the contract month. The last day for the trading of the contract shall be two working days prior to the final settlement date or value date.

Settlement Date – For all the contracts, the final settlement date is the last business day of the month.

Basis: Basis is the difference between the futures price and the spot price.

Basis = Futures price – Spot price

In a normal market, the basis is positive as futures prices normally exceed spot prices.

Pip or Tick – Pip is an abbreviated form for a point in percentage. It is also called a tick. Pip is a standardized unit of change in a currency pair. 1 pip represents the smallest amount by which a currency quote can change. The value of 1 pip for all the four currency pairs, USD/ INR, GBP/ INR, EUR/ INR, and JPY/ INR is fixed at 0.0025.

Margin – Before entering into a futures contract, there is an initial margin requirement that needs to be deposited in the trading account. While trading futures, we just need to deposit a margin amount for every trade. The whole amount does not need to be there in the account.

It is a good advantage for a trader if the market moves in the anticipated direction.

Mark to Market – The margin account is adjusted at the end of each trading day in the futures market. This adjustment reflects the trader’s loss or profit depending on the closing price of the futures contract.

Short and long Positions – When a trader is bearish for any currency, he will sell it. This is called taking a short position. The trader will earn a profit if the currency will depreciate. Similarly, when a trader is bullish for currency and anticipates that its value will go up, then, he will buy the currency.

This is known as taking a long position. In this case, the trader will make a profit if the currency appreciates according to his/her expectations.

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