The Reserve Bank of India (RBI), which is the national bank of India, has a lengthy set of regulations that govern Indian citizens’ foreign exchange (forex) activity. The Foreign Exchange Management Act (FEMA) of 1999 does not allow private Indian residents to trade in overseas or domestic forex markets. Unscrupulous investment companies, both foreign and domestic, may contact gullible citizens and entice them into investment or trading schemes, which is a reason RBI gives for such regulations, according to the India Times. Rather than trading for themselves, the RBI requires all Indian citizens to trade with an authorized broker under specific guidelines.
Use a Licensed Broker for All Trades
To curtail investment scams, the RBI requires all brokers to be registered with the Securities and Exchange Board of India. Licensed brokers must be legal Indian residents and must abide by specific trading guidelines and regulations. A licensed currency broker will be able to show his customers his proper credentials and will be able to provide quick and timely proof that the customer’s trade has been processed. Registered banks and brokers must also maintain certain levels of net worth and capital availability. They must also have shown a profit for the three most recent years, according to the RBI.
Regulations for Currency Trading
Brokers exact forex investments on world currency markets, which is the largest and most active financial market in the world. Forex brokers execute trades on currency pairs, such as the United States dollar and the Indian rupee, and attempt to profit based on the relative value each currency has compared to the other. The RBI regulates currency options trading by controlling the types of financial tools and investment instruments brokers can use. Brokers can only trade vanilla options, which are options with no special privileges. Brokers must also not pay investment premiums to groups outside of India and can only purchase investment options and other derivatives under certain conditions, such as to offset investment risks, according to RBI.
Limits on Trading Activity
The RBI limits the number and volume of forex trades that brokers can execute. The RBI establishes these limits individually based on the broker’s Net Open Position (NOP) and Aggregate Gap (AG) limits. NOP is a broker’s exposure to risky currency investments and is expressed as a percentage of its overall investments. AG limits represent the percentage of a broker’s overall investments that are used to offset the riskiness of other investments. AG is composed of several factors, such as the broker’s available capital, according to the website Business Standard. The RBI can monitor trading activity based upon the required documentation each broker must file. The RBI can also modify trading eligibility requirements as it deems necessary.
Currency Exchange for Traveling
Trading Indian rupees for foreign currencies is also subject to RBI guidelines. All foreign exchange trades for private travel can be made without permission from the RBI, but those trades must be made through authorized dealers who abide by specific guidelines. For private travel to most countries, Indian residents can exchange the equivalent of US$10,000, as of 2011. For business travel, resident Indians can exchange up to US$25,000. The RBI restricts the amount of currency Indian citizens can exchange before traveling to countries such as Iraq, Libya, Nepal and Bhutan, according to the website Sun Forex.