Banking regulator RBI (Reserve Bank of India) recently released an ‘alert list’ of unauthorised foreign exchange (forex) trading platforms. This was done after it noticed that these platforms attempted to entice people through misleading advertisements on OTT platforms and gaming apps by assuring lofty returns. This alert list of unauthorised platforms includes popular names such as Octa FX, Ameritrade and Olymp Trade. Ultimately, apart from understanding the risk involved in currency trading, investors also need to check if they aren’t at the wrong side of the law. Here’s what you should know.

Who regulates forex trading?

In India, RBI regulates all the foreign exchange transactions, while forex trading is regulated by SEBI. Trading firms must follow the rules of the Foreign Exchange Management Act, 1999 (FEMA). It is clarified under FEMA that an Indian resident can undertake foreign exchange transactions with authorised persons and for permitted purposes only. Forex trading activities outside the purview of FEMA regulations are punishable offences and the person shall be liable to pay a penalty of up to ₹ 10,000 per day for such trading while also facing jail for up to five years. Forex trading activities are highly regulated in India due to RBI’s need to keep currency fluctuation in check. This is also to avoid the risk of high losses on account of the leverage involved.

What’s allowed, what’s not

In India, forex trading is permitted, but it comes with certain restrictions. An Indian resident can trade only in seven currency pairs, which includes four currencies against Indian rupee (INR) and three cross currency pairs. Currencies against INR in which trading is permissible are USD/INR, EUR/INR, GBP/INR and JPY/INR while cross-currency pairs allowed are EUR/USD, GBP/USD and USD/JPY. Additional currency pairs can be traded as and when introduced in future. Such transactions can be executed only through the electronic trading platforms (ETPs) authorised by the RBI and on exchanges such as BSE, NSE and Metropolitan Stock Exchange of India. The list of authorised platforms is given on the SEBI website, and it can also be seen here Here, for both futures and options, SPAN (standardised portfolio analysis of risk) margin shall be collected by the clearing houses of stock exchanges, which is based on 99 per cent Value at Risk (VaR) while extreme loss margin is also charged.

An Indian resident is not allowed to trade in overseas foreign exchange trading markets. You might have come across advertisements of some online forex trading platforms offering enormous leverage of, say, 500 times and enticing you into making a quick buck through them. These platforms might be popular across the globe but trading through such platforms is illegal in India. They basically offer contract for differences (CFD) and binary options.

Under CFD, an investor enters into a contract with a broker wherein broker purchases asset for the investor and investor earns profits or incurs losses based on the difference between opening and closing price while binary trading works like an all-or-nothing gamble. These products aren’t regulated in India and are traded on OTC (Over the counter) basis as no exchange or clearing house is involved here. To attract investors towards such products, they could be misguided by quoting the $250,000 per year LRS (Liberalised Remittance Scheme) limit for foreign transactions. However, do note that remittance in case of foreign exchange trading activity isn’t allowed under this scheme.

What should you do?

To start currency trading in India, you need to open an account with an RBI authorised broker/platform from the list mentioned earlier, by fulfilling the KYC requirements and depositing the required margin amount. Internationally, the most liquid currency pairs are EUR/USD and USD/JPY but have lower liquidity on Indian exchanges. To trade seamlessly, one can even construct such pairs through INR pairs. For instance, to construct a net long position in USD/JPY, one can go long in USD/INR and short in JPY/INR. However, do note that these types of trades attract high transaction costs.

Ultimately, to trade in currencies, one needs to have an understanding of geopolitical and macro aspects. Also, the risk element is high due to the leverage factor. Hence retail investors must avoid forex trading. Those who are already involved in currency trading must make sure that they don’t trade currencies through any of the 34 unauthorised ETPs as mentioned in the RBI’s alert list, which can be found out through RBI’s website, or you can also go here However, keep in mind that this is not an exhaustive list and other names can also be added to the list in future.