The forex market is important to the ecosystem of many countries. That’s why governments including GoI are known to be thorough when setting rules, regulations, and caveats for forex trading. Then, is forex trading legal in India? Here’s the answer 👇
Is Forex Trading Legal in India?
Yes, forex trading is legal in India. But it comes with a catch. Forex trading must be done through SEBI-authorized entities like Dhan on recognized exchanges like NSE and BSE. That’s not all. There are more caveats as well.
Indian forex traders can only buy and sell currency derivatives like futures and options. These derivative contracts are cash-settled. What this means is simple – a bag of foreign currency won’t be delivered to your doorstep.
Instead, forex trades in India operate on the basis of the market value of the underlying currency pair on settlement. Generally, the market value is the difference between the market price and the price mentioned in the contract.
Furthermore, there are many types of currency pairs on the market. Only a handful of them can be traded in India. Most of these forex pairs have INR as the quote currency, although there are foreign currency crosses available.
If you don’t know what a quote currency or currency pair is, you can read about it in A Guide to Forex Trading in India: Learn Forex Trading.
Here is the complete list of tradable forex pairs in India:
So far, we’ve answered the question of “is forex trading legal in India” by giving you a broad overview. Now, it’s time to look at the finer details of India’s fox market, starting with the rules & regulations set by SEBI and RBI.
Important Forex Trading Rules & Regulations in India
SEBI is the market regulator for forex trading in India. Along with RBI which regulates the broader forex market, the two financial institutions have set rules and regulations for forex trading via a series of circulars.
What we’ve done is simplified multiple regulations. This can help you with two things. First, you’ll have a much more comprehensive understanding of India’s forex rules. Second, you’ll never have to Google “is forex legal in India”.
1. Authorization & Compliance
SEBI published the first circular for forex trading on 06-08-2008. It laid out several important pointers, starting with the fact that forex trading is effectively legal in India. The regulations were created by RBI and SEBI.
Important highlights of the circular include:
- The concept of what constitutes a recognized exchange, clearing corporation, trading member, and more
- A Trading Member’s gross open position across all contracts can not be more than 15% of the total open interest or more than USD 25 million (whatever’s higher)
- A Trading Member that’s a Bank must maintain a gross open position that does not exceed 15% of the total open interest or more than USD 100 million (whatever’s higher)
2. Currency Pairs & Derivatives
Forex trading in India was initially open to 4 currency pairs that had INR as the quote. This is the list of FCY-INR pairs that were and are still tradeable in India:
In 2016, foreign cross currency pairs were also made available for Indian forex traders. This included and still includes three foreign cross forex pairs:
Bear in mind that each circular explicitly mentions Exchange Traded Derivatives, meaning currency pairs can only be traded via synthetic positions with futures and options contracts.
3. Latest Position Limit
The position limit for clients, exchanges, and currency pairs has gone through several revisions since 2008. This is the latest position limit for trading currency derivatives in India based on SEBI’s circular dated 07-09-2021. Gross Open Position Limit for clients:
- USD-INR: not more than 6% of total open interest or USD 20 million (whatever’s higher)
- EUR-INR: not more than 6% of total open interest or EUR 10 million (whatever’s higher)
- GBP-INR: not more than 6% of total open interest or GBP 10 million (whatever’s higher)
- JPY-INR: not more than 6% of total open interest or JPY 400 million (whatever’s higher)
These revised position limits apply to domestic clients, NRIs, and Category II FPIs (individuals, family offices, and corporates)
SEBI also allows Exchanges and Clearing Corporations to enforce other safeguards to mitigate risk and ensure compliance as they deem fit.
Furthermore, domestic participants are allowed to take long or short positions totaling up to USD 100 million as a single limit for all forex pairs with INR as the quote across all stock exchanges like NSE and BSE.
If a domestic participant wants to take a position in an INR currency pair beyond USD 100 million, they will have to comply with the terms and conditions laid out by the RBI in these circulars:
- RBI A.P. (DIR Series) | Circular no. 147 | 20-06-2014
- RBI A.P. (DIR Series) | Circular no. 90 | 31-03-2015
4. Forex Derivatives Lot Size
In India, forex derivative contracts can be bought based on “lot size”, which is a fixed amount of currency that’s included in each contract. Rules and regulations suggest that the lot size for forex options and futures are generally in multiples of thousands.
Most INR forex pairs have one lot size equal to one thousand of the base currency. Here’s a detailed list of all the forex lot sizes in India:
- USD-INR: $1000
- EUR-INR: €1000
- GBP-INR: £1000
- JPY-INR: ¥1,00,000
- EUR-USD: €1000
- GBP-USD: £1000
- USD-JPY: $1000
5. Expiry & Settlement of Forex Derivatives
The Indian forex market is active from 9.00 AM to 7.30 PM. But, the expiry of forex futures and options takes place at 12.30 PM. Furthermore, the expiry date of these derivatives contracts is typically on the third last working day of the month.
As the official language puts it, expiry happens two working days before the final working day of the month. The settlement of forex derivatives happens on the final working day of the expiry month. Note that Saturdays are excluded from this.
Forex trading is legal in India and can be done through SEBI-authorized brokers like Dhan. You must, however, ensure that you are compliant with the rules, regulations, and norms set forth by RBI, SEBI, and your forex broker.
Once you’ve gone through the compliance formalities and your forex trading account is successfully opened, you can start trading currency pairs like:
While forex trading is legal in India, it is known to be a complex discipline that may require you to gain a thorough understanding of trading, technical indicators, charts, markets, and of course, types of forex pairs.
You can learn more about currency trading and trading as a whole with these blogs:
Happy reading & trading!
Disclaimer: This blog is not to be construed as investment advice. Trading and investing in the securities market carries risk. Please do your own due diligence or consult a trained financial professional before investing.