Benefits of Currency Trading in India

Most individuals are not aware of currency trading as they are of stock and commodity trading. Currency markets are the world’s largest financial market, with volumes in trillions of dollars. It is a high-potential market where trades happen with foreign currencies.

Currency markets are also referred to as foreign exchange markets or forex markets. In our country, currency trading mostly takes place through currency derivatives on recognised stock exchanges.

Read on to know about the features, benefits, risks and other important factors of currency trading.

Features of Currency Trading in India

Let us take a look at the features of currency trading: 

• Currency trading contracts are speculative, i.e. a trader does not receive the physical delivery of currencies. 
• In India, currency trading is permitted for only 7 pairs of currencies—EUR/INR, USD/INR, JPY/INR, GBP/USD, GBP/INR, USD/JPY and EUR/USD.
• Currency trading takes place on 3 exchanges in India, namely the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE) and the Metropolitan Stock Exchange of India (mSXI). Both the Reserve Bank of India (RBI) and the Securities Exchange Board of India (SEBI) regulate this market.
• The lot size is 100 units for EUR/INR, USD/INR, and GBP/INR. However, the lot size is 1,00,000 units for JPY/INR. 

Benefits of Currency Trading in India

Now, it’s time to check the benefits of currency trading in India:

• High Liquidity

A major benefit of getting into currency trading is that people can quickly enter and exit huge positions. As the forex market is global and has the largest trading volumes, currencies carry the highest liquidity among asset classes. This allows businesses to run smoothly regardless of the market value of domestic or international currencies.

• Hedging

The process of adding layers of protection to an investment portfolio against unanticipated future losses is referred to as hedging. Resident Indians use currency trading as a hedge for their offshore investments. On the other hand, NRIs use it to hedge their investment portfolio in India.

• Low Entry Barrier 

Now, people can engage in currency trading even with small capital. If they employ the correct strategy, they will reap immense benefits. As more and more retail traders are getting to know of its benefits, the popularity of currency trading is increasing.

• Low Margin Requirements

Currency trading enables traders to receive an optimum rate of return on their investment amount. This is because it allows traders to purchase and sell currencies by depositing only a small percentage of the position, which is in stark contrast to equity markets.

• Arbitrage

As mentioned before, currency trading takes place on BSE and NSE in India. Traders can get reap massive profits by taking advantage of market inefficiencies. For example, they can buy low and sell high the same currency on different currency exchanges if there is a price difference. Profits are multiplied if they use a high degree of leverage.

• Speculation

To gain from the currency exchange rate fluctuations, traders need to predict the possible direction of the currency market movements. For instance, traders can purchase USD/INR futures if they feel there is a possibility of USD appreciation again in INR due to a rise in crude oil prices. 

However, if they feel there is a possibility of INR appreciation, they can engage in short-selling USD/INR futures to reap benefits from the market movement.

Risks of Currency Trading in India

While previously only banks and financial institutions engaged in currency trading, now, even retail traders/investors can participate. However, traders/investors need to know that currency trading involves a high risk of losses as their values are associated with a lot of variables.

Discussed below are the risks involved in currency trading in India: 

• Credit Risk

Credit risk is mainly associated with banks and financial institutions. It arises when the counterparty fails to fulfil its debt obligations with respect to a foreign exchange position.

• Interest Rate Risk

A strong correlation exists between a country’s interest rates and its currency. A rise in the interest rates of a country is accompanied by an increase in investments by international investors. This improves the demand and value of the domestic currency. 

Similarly, when the interest rates fall, the currency’s value will drop as these foreign investors withdraw their investments. Thus, interest rate risk in currency trading is an essential factor to consider. This is because differences in currency values can result in huge profits or losses.

• Leverage Risk

For currency trading, traders need to deposit a small amount called a margin to get access to leverage. Using leverage, traders can make high-volume trades, massively increasing their gains or losses.

However, even a small price fluctuation can cause margin calls. In such situations, traders might have to pay an extra amount as a margin. Aggressive usage of leverage in a volatile market may result in losses of initial investments. 

• Counterparty Risk

The currency market has rules and regulations to protect its investors. But, because it is an international market, comprehending the fast-changing rules of different countries is a challenge. There always remains a risk that the counterparty, who is the supplier of the investor’s asset, may fail to meet its obligations. The risk of default is referred to as counterparty risk. 

• Country Risk

The currency exchange rates of many developing nations depend on leading currencies such as the USD. The central banks of these developing countries must hold sufficient reserves to maintain the exchange rate. Its currency might get significantly devalued in case of frequent deficits in payment. 

This will negatively impact prices in the currency market, and market partcipants will withdraw their investments anticipating major losses. 

Things to Remember While Trading in Currency Markets 

Keep in mind the following points while trading in currency markets:

• Traders must first understand their risk and reward profile before trading in currencies. 
• It is important to choose a reputable broker and trading platform as a good broker is essential to be successful in currency trading. An efficient broker will update real-time prices and provide news of currency-related events in time. It reduces the chances of losses.
• No trade guarantees sure success. So, before embarking on currency trading, traders should focus minutely on their entry and exit points.
• It helps to have adequate knowledge about the possible trading scenarios to incur minimum losses. Moreover, traders should not hesitate to exit the market if it is not in their favour.
• It always helps to have a thorough knowledge of national and international economies and geopolitical events to be successful in currency trading.

Final Word

Currency trading has gained immense popularity among traders and investors over the past few years. It has many benefits, such as high liquidity, low entry barrier, hedging and arbitrage. However, people need to be aware of the various risks associated with currency trading, such as interest rate risk, counterparty risk, country risk and leverage risk.

Frequently Asked Questions