The forex market

Currency pairs, spot, forwards, futures and options, the permitted channels under FEMA and RBI rules, and how to spot an unauthorised forex platform.

The foreign-exchange market is where currencies are exchanged and their relative values are determined. No currency has a price on its own, only a price against another one.

Forex is far larger than its retail image suggests. It is used by:

• Individuals paying for overseas travel, education or medical care, and receiving remittances from abroad.
• Importers and exporters settling foreign invoices, often months after agreeing a price.
• Banks and financial institutions, which provide the liquidity and the settlement rails the whole system runs on.
• Businesses and investors hedging exposure, so that a currency move does not damage an unrelated business decision.
• Eligible market participants undertaking permitted trading activities.

Most of that is not speculation. It is the machinery that lets money cross borders for ordinary commercial reasons. Trading currency is one use of the market, and it is the use most likely to be marketed to you badly.

Forex transactions involving Indian residents are subject to FEMA, the Foreign Exchange Management Act 1999, and the RBI’s rules made under it. That framework decides who may deal in foreign exchange, for what purposes, and through which channels. It is covered in detail below, because getting it wrong is the single most expensive mistake a retail trader can make here.

Currency pairs and how they are quoted

Currencies are always quoted in pairs, because the value of one is expressed relative to another.

• The base currency is the first currency in the pair. It is the unit being priced.
• The quote currency is the second, and the rate tells you how many units of it you need for one unit of the base.
• The exchange rate is that number: quote currency per unit of base currency.

So USDINR at 85 means one US dollar costs ₹85. If USDINR rises from 85 to 87, the dollar has appreciated against the rupee, which is the same statement as saying the rupee has depreciated against the dollar.

INR pairs

JPYINR is the one that catches people out. The contract is quoted as rupees per 100 yen, not per one yen. A quote of 6.00 does not mean a yen is worth ₹6, which would be absurd. It means 100 yen cost ₹6. The contract’s unit of trading is 100,000 yen, so one unit is ₹6,000 at that price. Converting a JPYINR quote to a per-yen figure means dividing by 100.

Cross-currency pairs

A cross pair involves no rupee at all.

These are the pairs quoted across the global market. Note that being quoted globally does not mean they are available for you to trade on an Indian exchange. Contract availability on Indian exchanges is limited to what NSE, BSE and MSEI have listed, and it changes.

Why currency prices move

An exchange rate is a price of one economy against another, and several forces push it at once.

• Interest-rate differences. Higher rates attract capital, which tends to support a currency.
• Inflation and purchasing power. Persistent high inflation erodes what a currency buys.
• Trade flows. A country that imports more than it exports must continually sell its currency to pay, which weighs on it.
• Capital and foreign investment. Money moving in or out changes demand for a currency directly.
• Central-bank policy. Rates, and sometimes direct intervention in the market.
• Growth and expectations. Markets price what is expected, not only what has happened.
• Political and geopolitical events. Risk moves quickly and is hard to model.

Currency prices reflect the interaction of all of these. A single indicator such as “the trade deficit” does not explain a move, and anyone who quotes you one is simplifying.

What a rate move costs a business

Take an Indian importer that owes $10,000.

A 2.35% move in the exchange rate became ₹20,000 of extra cost, on an order agreed at a fixed dollar price. The figure excludes bank charges, the spread between the buy and sell rates, and other transaction costs.

This cuts both ways. Rupee depreciation raises the rupee cost of dollar-denominated imports, while an exporter receiving dollars may receive more rupees for them. All else being equal, and before costs.

The four kinds of forex transaction

Spot forex is an exchange of currencies at an agreed rate with near-term settlement, depending on the currency pair and market convention. It is the mechanism behind permitted conversions for travel, education, imports and remittances.

A forward is an agreement to exchange currencies at a specified rate on a future date. Forwards are the workhorse of corporate currency risk management: an importer locking today’s rate for a payment due in six months has removed an unknown from its costs.

Currency futures are standardised contracts traded on an exchange, with a defined contract size, an expiry, margin requirements and a settlement procedure. Unlike a forward, a future is standardised and traded centrally.

A currency option gives its buyer the right, but not the obligation, to deal at an agreed rate. A call is the right to buy the base currency, a put the right to sell it. The buyer pays an up-front premium for that right and gives up the obligation.

What you may do with each instrument in India depends on your eligibility and on FEMA and RBI rules, which are the subject of the next section.

Forex trading regulations in India

This is the section to read twice. A great deal of misleading advertising about forex in India comes from blurring these lines.

The starting point: authorised persons and permitted purposes

Under FEMA, resident persons may undertake forex transactions only with authorised persons and only for permitted purposes. An authorised person is an entity the RBI has authorised to deal in forex: an authorised dealer bank, a money changer, an off-shore banking unit, or another person authorised under Section 10(1) of FEMA.

Doing the same transaction through an unauthorised person, or for a purpose FEMA does not permit, is a different matter. RBI states plainly that it renders the resident person liable for penal action under the Act.

Permitted purposes include the current-account transactions that most people meet in ordinary life: payments connected with foreign trade and services, transfers for living expenses of parents, spouse and children abroad, and expenses for travel, education and medical care.

Over-the-counter forex derivatives

Permitted forex derivatives are not restricted to exchange-traded contracts. Eligible participants may enter over-the-counter forex derivatives through authorised counterparties, and the products permitted to retail users include:

• Foreign exchange forwards
• Foreign exchange swaps and currency swaps
• Purchase of call and put options
• Purchase of call and put spreads

Non-retail users, defined as regulated financial entities, entities meeting a prescribed net worth or turnover threshold, and non-resident entities other than individuals, have a wider permitted product set.

So a bank offering you a forward contract is not doing something unlawful. It is one of the permitted channels.

Permitted purpose depends on the pair, and this distinction decides who may do what:

• FCY-INR derivatives (for example USDINR forwards, futures and options): permitted for hedging exchange rate risk.
• FCY-FCY derivatives (for example EURUSD): no restriction on purpose.

Exchange-traded currency derivatives

Recognised Indian exchanges, which are NSE, BSE and MSEI, offer standardised currency futures and options, subject to RBI, FEMA, SEBI and exchange requirements.

This is the route a retail investor uses, through a SEBI-registered broker who is a member of the relevant exchange. The contracts are the same currency futures and options described above.

Availability and permitted purposes change through regulatory amendment and exchange circulars, so the current contract list should be read off the exchange rather than from a lesson.

The October 2026 tightening of rupee forex derivatives

On 10 October 2026 the RBI issued two circulars, A.P. (DIR Series) No. 25 and No. 26, which reset thresholds operating under the Master Direction on Risk Management and Inter-Bank Dealings. Both took effect immediately, with no transition period.

The reserve is narrower than the headline suggests. It applies to rupee contracts above USD 2 million equivalent that hedge a current account transaction, and specifically where the customer is buying foreign currency against the rupee. It is held with the RBI until the contract terminates and reported daily through the RBI’s centralised information system.

Attempting to get under the USD 2 million threshold by splitting a position across several transactions with one or more dealers is itself treated as a violation.

Three things worth being precise about:

• An underlying exposure is a real commercial need for foreign currency, such as an import bill or an export receipt. The point of the reduced threshold is that a large unhedged currency position now has to be justified by one of those.
• The circulars state no separate penalty. They are issued under FEMA and the RBI Act, and the existing FEMA framework applies.
• The circulars’ own stated rationale is evolving market conditions, orderly functioning of the forex market, market discipline and appropriate risk management. Reading them as a move against the rupee specifically is commentary, not something the circulars say. The direction of travel is nonetheless clear: the rules are being tightened in the direction of hedging rather than short-term positioning.

For an individual retail trader the USD 5 million threshold is not the binding constraint. What reaches you is the paperwork: your dealer must now establish and document your underlying exposure, obtain an undertaking about double hedging, and is likely to quote wider on larger rupee purchases while it holds the cash reserve.

This is a fast-moving area. Read the circulars themselves rather than a summary, including this one.

Offshore platforms

A foreign regulatory licence does not automatically authorise a platform to offer forex services to Indian residents. An overseas-licensed firm must still satisfy the Indian requirements to deal in foreign exchange with residents.

It is also too strong to say that every offshore currency transaction is illegal. Legality depends on the transaction, its purpose, the parties and the applicable rules. What is clear is that a foreign licence does not substitute for the authorisation Indian law requires.

One point worth knowing: the Liberalised Remittance Scheme cannot be used to fund forex trading. LRS remittances are for permissible current and capital account transactions, and margins or margin calls sent to an overseas exchange or counterparty are not permitted under it.

Trading hours and expiry

Two different markets share the name, and they do not share a schedule.

The global forex market is the international over-the-counter market. It operates across the world’s financial centres and is generally active around the clock from Monday to Friday, subject to market conventions and national holidays.

Indian exchange-traded currency derivatives follow the exchange’s own timetable. For NSE INR currency derivatives the normal hours are Monday to Friday, 9:00 AM to 5:00 PM IST, excluding exchange holidays. The same applies to the JPYINR contract, which is quoted in rupees per 100 yen and trades on that schedule.

Expiry on NSE currently follows these conventions, and they differ by contract type:

The weekly cycle is not universal, and this is where most summaries go wrong. NSE lists weekly futures and options on the four INR pairs (USDINR, EURINR, GBPINR and JPYINR), but its cross-currency contract specifications carry no weekly expiry at all. So a pair appearing on an exchange’s contract list does not mean that pair has a weekly contract available, and you cannot carry a weekly convention across from an INR pair to a cross pair.

Do not treat this table as permanent. Expiry conventions, cut-off times and the contracts themselves are changed by exchange circulars, and the weekly cycle in particular has been extended and revised more than once. Check the official NSE currency derivatives contract specifications for the specific pair before acting on any of it.

Settlement of currency derivatives

Exchange-traded currency derivatives on Indian exchanges are generally cash settled in Indian rupees under the contract specifications. No currency changes hands on expiry day; only the difference between the two prices is settled.

Cash settlement describes these derivatives only. It does not describe all forex. A permitted spot transaction, or a forward that reaches delivery, involves actual currency being exchanged.

Futures settle by daily mark-to-market: gains and losses are computed and settled each day, so the position is reset rather than being carried at an old price. Final settlement happens on the expiry day. On the NSE INR contracts the daily settlement cycle is T+1 and final settlement is T+2.

Options settle according to the contract terms and the option type. The buyer pays a premium for the right; on expiry the outcome depends on where the underlying rate finished against the strike.

The final settlement price is the reference rate named in the relevant contract. For the INR-pair contracts this is the RBI reference rate, so the exercise is against an independently published figure rather than against the exchange’s own last print.

Margins, leverage and risk

Initial margin is the funds or eligible collateral required to open a leveraged derivative position.

Mark-to-market is the periodic recognition and settlement of gains and losses as the price moves, as described above.

Leverage is exposure to a notional position larger than the funds committed. A position of ₹5,00,000 controlled by ₹50,000 of margin is ten times leveraged.

Margin shortfall arises when available funds or collateral no longer meet the applicable requirement.

Requirements depend on exchange rules, contract specifications, volatility, current risk parameters and regulation. They rise when volatility rises.

Leverage magnifies losses exactly as it magnifies gains. A one percent adverse move on a ten-times leveraged position is a ten percent loss of the margin committed, and the position will then face a margin call.

Two corrections to common claims, because both are used to mislead:

• Low margin is not caused by the underlying market being illiquid. Margin is a risk parameter set by the exchange.
• Low charges and tight spreads are not evidence of fraud. A competitive price is what a competitive market looks like.

Forex frauds and unauthorised trading platforms

Unauthorised platforms market themselves to retail investors with misleading advertising, promises of high returns, very high leverage and arrangements whose mechanics are not explained. The pattern is consistent enough to be recognisable.

Warning signs:

• Guaranteed returns, or returns that are suspiciously consistent month to month.
• Claims that forex trading is risk-free.
• Extremely high leverage with no risk disclosure.
• Pressure to deposit money immediately, including urgency about a price that is “about to move”.
• Instructions to transfer funds to a personal account, an unrelated entity, or a suspicious payment channel.
• Vague or unprovable claims of regulatory authorisation.
• Withdrawal restrictions, or fees demanded before funds are released.
• Claims that a foreign licence makes the platform authorised in India.
• Managed-account schemes promising a fixed monthly profit.
• Implied association with the RBI, SEBI or a recognised exchange.

Low brokerage or a tight spread is not, by itself, a warning sign. Price is not the question. Authorisation is.

The RBI Alert List

The RBI maintains an Alert List of unauthorised forex entities. It names entities that are neither authorised to deal in forex under FEMA nor authorised to operate electronic trading platforms under the RBI’s ETP Directions. The list also names entities and websites that appear to promote unauthorised ones.

Use that RBI page rather than a downloaded copy. It carries the current version, it is the authoritative source, and it is reissued periodically. A PDF you are given, or a copy of the list quoted in an article, is a snapshot of one particular date and goes out of date silently.

Four things about it:

• The list is not exhaustive. It reflects what the RBI knew when it was published, and it changes.
• Absence from the Alert List does not mean an entity is authorised. The RBI states this directly. Authorisation has to be established positively, from the list of authorised persons or the list of authorised electronic trading platforms.
• Being on the list does not by itself mean the company is a fraud. The entry means the entity is not authorised to deal in forex, or to run a forex trading platform, for Indian residents. Some names on the list are regulated and operating legitimately in other countries. Regulated elsewhere does not authorise them here, but the two facts are different and conflating them is its own error.
• Do not rely on a list of named platforms copied from a news article or an older version of a lesson. Status changes, and a name on a stale list is not current fact.

How to verify a legitimate forex provider

Before you send money anywhere, work through these:

1. Is the entity authorised by the RBI to deal in forex, where that is the activity? Check the official list of authorised persons.
2. If it operates an electronic trading platform, is the platform RBI-authorised under the ETP Directions? Check the official list of authorised ETPs.
3. If you intend to trade exchange-listed currency derivatives, is your broker SEBI-registered and a member of the exchange where the contract trades?
4. Is the product and the purpose permitted under FEMA and RBI rules? FCY-INR derivatives are for hedging.
5. Are the terms clear? Fees, margins, contract specifications and withdrawal conditions should all be documented before you commit funds.

Two distinctions worth keeping straight:

• SEBI registration as a stock broker does not automatically authorise forex activity. The permissions are different.
• A foreign licence does not replace Indian authorisation.

Complaints about unauthorised forex platforms can be filed on the National Cyber Crime Reporting Portal at cybercrime.gov.in, and with the Enforcement Directorate.

Before you rely on any of this

This lesson is educational. Forex and currency derivatives carry financial risk, and leverage magnifies losses as well as gains. Indian residents must comply with FEMA and RBI requirements, and rules change.

Verify regulatory authorisation yourself before using any forex service, and read the current exchange contract specifications rather than trusting a summary, including this one.

Next: the commodities market.