Forex Trading Challenges in India

Forex trading is about exchanging one currency for another through various contracts such as spots, options, futures, swaps and forwards. The currency price fluctuations decide the profit or loss in these positions. The forex market witnesses daily transactions worth trillions of dollars, inevitably resulting in complexities, especially for those new to this. There are terminologies and lags in terms of market understanding. So, weve created a guide that will help understand the terminologies and the challenges people face regarding forex trading.

Forex Terminologies You Should Know

Currency Pairs

The forex market sees the trading of currency pairs throughout the day, such as INR/USD, USD/EUR, and USD/CAD.

Pip

It is extended to Percentage in Points, which is the smallest measurement unit to track currency price quotes. Most major currencies will have Pip as the fourth decimal point equalling 0.0001.

Ask Price

The lowest price at which the sale order can be executed.

Bid Price

The price the buyer is ready to pay.

Revealing the Forex Trading Challenges in India

The Indian forex trading market, despite attaining $60 billion in 2024, is plagued with multiple challenges that somewhat hinder its growth. The WikiFX team has brought to you the challenges existing in the market. Take a look.

Less Currency Pairs for Trading

The Reserve Bank of India (RBI) regulates forex trading in India under the Foreign Exchange Management Act (FEMA) regulations. The approved currencies for traders are limited. They can trade in these four pairs only-

• USD/INR
• GBP/INR
• EUR/INR
• JPY/INR

Regulatory Caps on Cash Imports/Exports

The FEMA has placed restrictions on the amount of cash forex traders can import or export. Restrictions are also on allowed capital and current account transactions in foreign exchange. The maximum amount exchangeable within the country is also capped for both individuals and firms. While these restrictions prevent the local currency from speculation risks, they also hinder the forex participants prospects.

Legal Actions

Unauthorized brokers are all over India with tall return promises. They collect a heavy amount from investors and transfer it to shell companies as part of their money laundering activities. While investors face losses due to these, they also face legal actions by the RBI if they trade through these brokers. Either, you will be made to pay a penalty or asked to stop trading in foreign currencies. So, knowing the registered and unregistered brokers is critical to ensuring you stay away from legal actions. You can, however, know this through WikiFX, which showcases the regulation status of every broker on its platform.

Hefty Fees and High Spreads

Brokers usually take hefty fees and commissions from traders. They also keep high spreads, resulting in more profits for them as the gap widens between buying and selling prices. So, traders with limited budgets find it hard to penetrate the forex trading market.

Increased Market Volatility

The forex market is volatile due to national, international, economic and political events. In todays times when geopolitical tensions are on the rise, currencies fluctuate constantly, raising opportunities and dashing hopes in equal measure. However, over the long run, everything settles, helping you earn a significant amount.

Leverage is Both a Blessing and Harm for Traders

‘Leverage’ in forex implies the amount traders can borrow from brokers to control a larger position. Indian forex markets typically offer leverage ratios ranging from 20:1 to 30:1. This means traders can control a position 20 to 30 times their initial investment. Since no caps are imposed on maximum currency price movement, traders with highly leveraged trades can lose their capital.

Conclusion

India‘s forex trading market still requires advancements to match the global standards besides increased tightening measures on unregistered brokers to prevent non-withdrawal issues for investors. With a more liberal yet robust approach, India’s forex market could see active participation from retail traders.