Legality of forex in India Exchange control

forex in IndiaForex in India is growing and contributing highly to the country’s economy. But it is done is done under very strict regulations laid down by the Reserve bank of India.  All illegal forex trading activities are tracked by the Reserve Bank of India and reported. Indians are allowed to participate in forex trading as long as they follow the guideline that was made in 2008. Most traders use Indian rupees and US dollars but other currencies can also be traded.

Forex in India and corporations

The corporations and institutions in India are allowed to trade in the forex market.  But this is regulated since the institutions and the corporations can only trade with free dollars from their reserves.  This means that they are not allowed to convert their Indian currency into dollars. They are also restricted to stick to leverage for less than ten times.  Forex in India is only available for corporations.

Electronic forex trading

Individuals are also restricted to electronic and internet based forex trading.  The main reason behind this is that electronic based forex trading brings them high returns but at very high charges- imprisonment.  The RBI has warned individual traders of online trading portals which offer these alluring outcomes of high gains, but do not reveal to the traders that they are engaging in illegal activities.

Forex in India and exchange control

Under exchange control, the forex activities of the whole world are usually brought under the control of a certain authority. This is the same case with India, the forex services are under the control of the RBI. The dealings with are regulated by the exchange control authority. Exporters are requires to surrender the foreign exchange earning for local currency.  This was set up by the government of India so as to achieve its own objections. Below are reasons why some countries like India may impose exchange control.

To conserve foreign exchange– This is the main objective of the foreign exchange regulation in India.  This is from the regulation laid down in the Foreign Exchange Regulation Act (FERA), 1973. This conserves the forgoing exchange resources of the country.

Regulate foreign companies– The exchange control may seek to control the business of foreign countries in the country. For example the FERA in India, regulated that foreign companies, other than banking companies, having more than 40 percent non-resident interests could not carry on in India. Such kind of companies could not open a branch or an office in India for carrying out trading, commercial or industrial revenue without the permission from the Reserve Bank of India.

Enable the government to repay debts– the exchange control enables the government to acquire forex from other countries. This makes it easier for the government to pay its loans.

To regulate the transfer of securities- the exchange control may be implemented so as to control the export and transfer of securities, from the country. The FERA in India prohibited the sending or transferring of the countries security to anywhere outside India without the permission of the Reserve Bank of India.

To obtain Revenue– the government may use the forex control so as to gain some income.  The government makes profits by keeping certain margins between the average buying and selling price of the foreign exchange.

To make essential imports– normally due to scarcity, developing governments have to import capital goods.  By giving priority to these imports the government may ensure availability of foreign exchange for these imports.

Conclusion

These are some of the reasons why the government of India has imposed exchange control. Exchange control directly affects the forex in India. This is because there is no Forex trade.

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