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Most traders interested in short-term market movements may opt for intraday trading in the stock market or options trading in the derivatives segment. However, there is another segment of the Indian financial markets that could be a potentially rewarding section if you have the right knowledge and strategies. This is the currency market, also known as the forex (or foreign exchange) market.
Currency trading in India holds great potential for experienced traders who are aware of how the market works and which forex trading strategies to use to maximise their chances of success. To help you make the most of the differences in the foreign exchange rates and get better at trading currencies, we will discuss some important aspects of this trading technique in this article.
10 Key Things To Know About Currency Trading in India
To trade currency online in India, you need to primarily rely on currency derivatives like options and futures. Before you start trading full-time in the currency market, however, get to know more about how forex trading in India works. Here are some important aspects that can help you understand this market segment.
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Regulatory Framework
Currency trading in India is uniquely regulated by the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI) and the Foreign Exchange Management Act (FEMA) 1999. The RBI oversees the overall forex market and sets broad policies, while the SEBI regulates the currency derivatives segment. Additionally, all transactions that occur in foreign currencies fall within the purview of the FEMA.
This threefold oversight creates a secure and distinct currency trading environment that includes strict guidelines on tradable currency pairs, position limits and market hours. If you want to buy and sell currency online, you should remain updated about the circulars from the RBI and the SEBI as well as any changes in the FEMA.
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Currency Pairs Available in India
Unlike the global forex market, India restricts currency trading to specific pairs approved by the Securities and Exchange Board of India. Currently, the primary pairs permitted to be trading in India include the USD-INR, GBP-INR, EUR-INR and JPY-INR pairs. Additionally, cross-currency pairs involving these currencies are also permitted, so you can implement forex trading strategies with EUR-USD, USD-JPY and GBP-USD pairs.
This limited selection aims to maintain market stability and prevent excessive speculation in less liquid global currencies. You can adapt your currency trading strategies to utilise these available pairs and focus on factors that specifically affect these currencies. That said, you should also remain aware of any changes to the permitted tradable currency pairs.
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Trading Platforms and Exchanges
Trading currencies in India is possible through authorised exchanges like the National Stock Exchange (NSE), Bombay Stock Exchange (BSE), and Metropolitan Stock Exchange of India (MSEI). This exchange-based system to buy and sell currency online differs from conventional over-the-counter (OTC) forex markets. It offers a more structured and transparent trading system.
Measures like standardised contracts and centralised clearing mechanisms reduce the counterparty risk in this market segment. Each exchange also has its own electronic trading platform, which is easily accessible if you have a demat and trading account with registered brokers. These are some of the best forex trading platforms available today as they offer live market quotes and quick order execution, depending on the contract’s liquidity.
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Trading Hours
The trading hours in India’s currency market are slightly longer than those in its equity market. Currency pairs with the Indian rupee can be traded between 9:00 AM to 5:00 PM from Monday to Friday. Cross-currency pairs, however, can be traded between 9:00 AM to 7:30 PM over the same days. This schedule differs significantly from that of the 24-hour global forex market. As a result, both trading strategies and liquidity patterns are impacted accordingly.
The Indian currency market often experiences high volatility during opening and closing hours as traders may react strongly to overnight global developments. Mid-day trading hours, however, may record lower trading volumes unless a new event or incident occurs during these hours. Also, global events occurring outside of these fixed trading hours may lead to gap openings in the Indian forex market — which may be positive or negative, depending on the position you hold in currencies.
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Margin Requirements and Position Limits
To ensure that currency trading does not become too speculative, Indian market regulators have imposed specific margin requirements and position caps for currency trading. As per SEBI’s peak margin rules, traders must have the full required margin in their account before placing a trade. In addition to this, some brokers may also offer leverage for traders who wish to trade in specific market segments. You need to verify if your stock broker offers this facility for forex trading.
There are also gross open position limits in the currency market — calculated as a fixed value or a percentage of the total open interest. For instance, client position limits in USD-INR futures are capped at 6% of the total open interest or USD 20 million, whichever is higher. These specific position limits require careful trade management and risk assessment.
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Impact of Economic Indicators
If you want to buy and sell currency online in India, you must closely monitor economic indicators that impact the currencies you are trading in. Some of the key indicators and factors in this context include RBI interest rate decisions, inflation data (CPI and WPI), India’s GDP growth rates and trade balance figures. Other unique aspects of the Indian economy, like foreign investment flows, oil imports and remittance inflows also play a crucial role in currency movements.
For instance, a widening trade deficit can make the INR depreciate, while strong FDI inflows may strengthen the domestic currency. It is crucial to understand the interplay of these factors and how they impact the values of your currency pair holdings. Similarly, you must also assess global economic indicators and their impact on the foreign currencies in your portfolio.
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Tax Implications
Currency trading is another important aspect to be aware of before you start or continue currency trading. Profits from trading any derivatives in India are typically classified as non-speculative business income. This also applies to currency derivatives. So, any income from this segment is taxed according to the income tax slab rate applicable to you. For example, if you fall in the 20% tax bracket, your currency trading profits will also be added to your income and taxed at 20%.
Any losses you incur in the currency market can be used to set off other eligible gains or income. In addition to the income tax payable on the profits, you may also have to account for other currency trading taxes like Goods and Services Tax (GST), Securities Transaction Tax (STT), brokerage fees (varies by broker) and any other SEBI charges.
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RBI Intervention and Currency Management
The RBI actively manages the Indian Rupee's value and volatility. It intervenes in the currency market through various mechanisms — including direct buying or selling of dollars and policy announcements. As a trader in India, you must stay alert to potential RBI interventions, which can cause sudden market movements. Understanding the RBI's currency management strategies is crucial for predicting short-term market trends in the context of Indian currency trading.
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Risk Management Strategies
Effective risk management is crucial in currency trading due to the market's volatility and the possible use of leverage. Key strategies include setting stop-loss orders to limit potential losses, using take-profit orders to secure gains and proper position sizing based on your risk tolerance.
It's generally recommended not to risk more than 1-2% of your trading capital on a single trade. Diversification across different currency pairs can also help spread risk. Additionally, understanding and using hedging techniques like taking offsetting positions in correlated currency pairs can also protect you against adverse market movements.
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Choosing the Right Broker
Selecting the right broker is a critical decision for currency trading in India. Look for brokers registered with SEBI and who are members of recognised exchanges. Key factors to consider include the quality of the trading platform, execution speed, customer support and competitive fees.
Some brokers offer additional features like research reports, educational resources and mobile trading apps as well. Compare the margin requirements and leverage offered by different brokers, but remember that higher leverage also means higher risk.
Conclusion
This sums up the key things you need to know about currency trading in India. To get started with your forex trading journey, open a demat and trading account with Samco Securities today. Also, ensure that you have a solid trading plan handy and are aware of the latest developments in this market segment.
Disclaimer: INVESTMENT IN SECURITIES MARKET ARE SUBJECT TO MARKET RISKS, READ ALL THE RELATED DOCUMENTS CAREFULLY BEFORE INVESTING. The asset classes and securities quoted in the film are exemplary and are not recommendatory. SAMCO Securities Limited (Formerly known as Samruddhi Stock Brokers Limited): BSE: 935 | NSE: 12135 | MSEI- 31600 | SEBI Reg. No.: INZ000002535 | AMFI Reg. No. 120121 | Depository Participant: CDSL: IN-DP-CDSL-443-2008 CIN No.: U67120MH2004PLC146183 | SAMCO Commodities Limited (Formerly known as Samruddhi Tradecom India Limited) | MCX- 55190 | SEBI Reg. No.: INZ000013932 Registered Address: Samco Securities Limited, 1004 - A, 10th Floor, Naman Midtown - A Wing, Senapati Bapat Marg, Prabhadevi, Mumbai - 400 013, Maharashtra, India. For any complaints Email - grievances@samco.in Research Analysts -SEBI Reg.No.-INHO0O0005847
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