When one thinks of financial markets, equities, bonds and commodities come to mind. However, there exists a foreign exchange market as well. In fact, worldwide, forex markets are the biggest markets, thanks to the exchange of a highly liquid asset. Currencies are traded in pairs, often for the purposes of hedging, speculation and arbitrage.
The exchange rate forms the foundation on which trading occurs in this market. The value of currencies is always fluctuating due to the volumes being exchanged, bought and sold. This helps determine the value of one currency in relation to another. Other than exchange rates, global events such as disasters, monetary policies, and shifts in economic and political situations have a bearing on the forex market.
There are few takers of forex trading even among those who regularly invest in the stock market. This is because of a lack of knowledge as well as some legal curbs around forex trading in India. While forex trading is allowed by law, there is a particular type of trading that is prohibited in India.
The Foreign Exchange Management Act (FEMA) does not allow binary trading in India. This is a type of trading offered on certain platforms where participants can bet whether one currency will rise or fall against the other. Should the participant win, they receive a predetermined amount of money and if they lose, the platform keeps it.
Often, these foreign exchange trading platforms also offer high leverage to participants, some even promising to return the initial investment in multiples of tens or hundreds if the user wins. Such exorbitant returns are made possible because of the absence of a third party facilitating these transactions. Unlike trading stocks, which is facilitated by an exchange, such platforms are not liable to pay any third parties.
Oftentimes, such binary trading platforms are advertised online, but are mostly based abroad. The Reserve Bank of India (RBI) in its Liberalised Remittance Scheme holds that money cannot be transferred abroad for speculation or providing money for trading. For this reason, participation in such binary trading is curbed in India.
What is allowed
Although binary trading remains banned, forex trading is allowed with certain restrictions. Investors can trade in foreign exchange through stock exchanges like the National Stock Exchange, Bombay Stock Exchange and Metropolitan Stock Exchange between 9:00 am and 5:00 pm. Four currencies – US Dollar, (USD), Great Britain Pound (GBP), Euro (EUR) and Japanese Yen (JPY) – can be traded in India, with only the Indian Rupee acting as the base currency.
In order to start trading in forex, investors are required to open a trading account with a certified brokerage. The regulations on forex trading in India make it a rigid process with limited possibilities, since only four pairs can be traded. However, with a careful assessment of the market and investment strategies, and keeping your goals and limits in mind, investors can make the most of the forex trading opportunities available in India. Investors can also make use of strategies such as price action trading, position trading, day trading and scalping to maximise their gains.
Like India, many places in the world have placed restrictions on binary trading. The lack of a third party or a regulator can make these trades very risky for investors, especially since they are based online. Traders may never know who is facilitating the transactions from behind a computer screen. Moreover, there have been multiple reports of fraudulent foreign exchange trading platforms that lure investors by giving them small wins initially, before raising transaction amounts. Once users start losing money on these larger amounts, such portals shut down without a trace.