Every citizen of India is involved in currency trading in India, whether directly or indirectly. If a person goes to a different country, for example, the USA, he will exchange the Indian Currency Rupee, for Dollar. A citizen is also indirectly involved in the foreign exchange market when he consumes or uses a product imported from a different country.
Along with these, the stock market is a way to trade in currencies. In this blog, we will describe more about currency trading in India.
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What Is Currency Trading?
Currency trading is also known as forex trading or foreign exchange trading. Trading in currency involves the buying and selling currencies in the forex market. The currency market in India is regulated by the Securities Exchange Board of India (SEBI) and the Reserve Bank of India (RBI).
Currency trading in India is done through the stock exchanges like NSE (National Stock Exchange) and BSE (Bombay Stock Exchange). The trader must have a trading account with a registered dealer and broker to trade in the foreign exchange market. For trading in the currency market, the trader must have a PAN Card, valid id proof and a bank account, and they should follow the rules and regulations which RBI and SEBI set.
Currency trading has its advantages but also the risks a trader before starting currency trading should know about the risks involved in it too.
History Of Currency Trading In India
Trading in the forex market has occurred in India since ancient civilisations. Before any currency, goods and services were exchanged through the barter system, and later in the Mughal era, coins made of gold and silver were used for trading.
The British East India Company established the first paper currency in India. Later, when India got independent in the year 1947, the Reserve Bank of India took control of the printing of the paper currency.
In 1971 the Bretton Woods System collapsed, which marked the beginning of the floating exchange rate system in the world. In the year 1978, the Reserve Bank of India (RBI) allowed the Indian banks to trade in currency. In the 1990s, India also adopted the floating exchange rate system.
In 2008 the Securities Exchange Board of India allowed the National Stock Exchange to launch currency derivatives after the government permitted retail investors to trade in the foreign exchange market.
At present, currency trading in India is regulated by the Reserve Bank of India and the Securities Exchange Board of India, and the trades can occur in the stock exchanges like National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
What are Currency Pairs?
Currency pair is a combination of currencies from two different nationalities. Between the two currencies, one is the base currency and the other the quotation currency.
The base currency is always denoted by 1. Some of the pairs which are traded in India are USD/INR, EUR/INR, JPY/INR, GBP/INR, EUR/USD, etc.
Let us understand more about the base and quotation through an example. In a trade of USD/INR, the US Dollar is the base currency, and the Indian rupee is the quotation currency. In this case, the USD is the stronger currency, so we write it as 1 USD = Rs 82.4.
Types of Foreign Exchange Market
Namely, there are three types of currency markets – the spot market, the futures market and the options market.
- Spot Market
In the spot market, the buying and selling of currency take place on the spot, and it happens very quickly. These transactions require payment at the current exchange rate, which is known as the spot rate. The traders who trade in the spot market are exposed very little to market uncertainty.
- Futures Market
In the futures market, the traders trade in currency futures; they are traded in lots and have an expiration date. The payment in these transactions can be done in future at a rate that was previously agreed upon. This rate is known as a future rate. Future contracts cannot be negotiated as they are all standard in date, size, etc.
- Options Market
The trader exchanges the currency at a predetermined price and date in the options market. The trader is not obligated to make a transaction in the currency market, but they have the option to do so. There are two types of currency options – the call option and the put option.
Advantages Of Currency Trading
There are several advantages of trading in the currency market. Some of them are:
- The currency market is the most liquid market as the buying and selling of the currency pairs can take place quickly, which helps the traders enter and exit the trade very quickly.
- Trading in the currency market helps the trader diversify his portfolio, as trading in the currency market differs from trading in the equity market.
- The currency market is a global market that is open for 24 hours globally from Monday to Friday. The currency trading time in India is from 9:00 AM to 5:00 PM.
- The cost of transactions in the foreign exchange market in India is less as compared to financial markets. Venus Tradex charges Rs 17 per order.
- The currency market is also very transparent and shows real-time prices and trade volumes to traders.
Risks In Currency Trading
Along with the benefits of currency trading, there are also certain risks that the traders may face while making a trade. Some of the risks that traders should know are:
- The foreign exchange market is very volatile, and the price fluctuates rapidly owing to any global event. This may lead them to unexpected losses if the event is not favourable.
- The currency’s price is highly influenced by factors such as inflation, GDP, etc. These factors may have a significant impact on the currency values.
- There are many forex brokers in India. Thus, the trader should open his trading account with a registered broker for trading in the currency market in India. Venus Tradex offers the services of currency trading in India.
- Another risk that the traders may face is the risk of a network outage or any other technical failure that may prevent them from executing a trade.
- As the currency market is operated globally, the political instability in any one country may affect the currency value of more than one country.
Currency trading in India is still an emerging way of trading, and the Indian government has relaxed some regulations concerning trading in the currency market. If there are advantages to trading in the currency market, it is also necessary to learn about the risks the traders may face.
If you want to diversify your portfolio, you can open a Demat account with us at Venus Tradex and start trading. You can also invest in mutual funds and know more about how to invest in mutual funds by reading our previous blog.
Frequently Asked Questions
What is the Forex trading time in India?
The timing of currency trading in India is from 9:00 AM to 5:00 PM on the stock exchanges.
Who trades in the foreign exchange markets?
The main participants of trading in the currency market are the hedgers (they hedge their risk), speculators (they generate profits) and arbitrageurs (they capitalise the price difference in the stock exchanges).
Is currency trading illegal in India?
Currency trading in India is very much legal, but it is required that the trader follows all of the regulations which RBI and SEBI have set.
What is the difference between Currency Trading and Forex Trading?
The terms Currency trading, Forex Trading or Foreign Exchange trading all of them have the same meaning.
Is a Demat account necessary for currency trading in India?
No, a demat account is not necessary; a trader can trade in the forex market using a trading account.