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RBI’s warning about illegal forex trading platforms: A Mint Explainer

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In Short:

The Reserve Bank of India governor is warning about unauthorized forex trading platforms that promise high returns like casino games, used by corporates and traders. RBI has asked banks to be alert and shared a list of 75 unauthorized entities. Only trading in four currency pairs is legal in India. RBI has taken steps to caution against unauthorized platforms and is working on stricter measures.

RBI Governor Raises Concerns Over Unauthorized Forex Trading Platforms

Recently, Shaktikanta Das, the Governor of the Reserve Bank of India (RBI), has expressed worries about unauthorized forex trading platforms that are commonly used by corporates and traders to manage their foreign currency risks. These platforms, which resemble casino games, promise high returns. The RBI has urged banks to be vigilant and compile a list of 75 unauthorized entities engaged in forex transactions. Let’s delve deeper into the reasons behind this warning.

What are Forex Trading Platforms?

Forex trading platforms are where foreign exchange transactions occur. They serve as tools for corporates and traders to hedge their foreign currency risks. These transactions can be carried out on authorized over-the-counter (OTC) spot or derivatives platforms regulated by the RBI. Another option is through RBI-approved exchange-traded currency derivative segments like the BSE, NSE, and the Metropolitan Stock Exchange of India. OTC or inter-bank transactions are conducted through electronic trading platforms (ETP) such as CCIL’s FX CLEAR or Reuters and Bloomberg platforms. They can also be executed through authorized brokers.

Rules on Forex Trading in India

Forex trading in India must be conducted via a registered Indian forex broker, on ETPs authorized by the RBI, or on recognized stock exchanges. According to the central bank, forex trading in India is only allowed in four currency pairs—dollar-rupee, euro-rupee, British pound-rupee, and Japanese yen-rupee, with the Indian rupee (INR) as the base currency. Trading in any other currency pair is illegal and may lead to penalties under the Foreign Exchange Management Act (FEMA). Additionally, Indian citizens are not permitted to trade foreign currencies abroad, either directly or indirectly.

Listing Unauthorized Forex Trading Platforms

In November last year, the RBI issued an alert list comprising 75 entities unauthorized to engage in forex transactions or operate ETP for forex dealings. Some of these entities include OctaFX, Alpari, AnyFX, Ava Trade, Binomo, Exness, Expert Option, FBS, FinFxPro, Forex.com, Forex4money, Foxorex, FTMO, FVP Trade, FXPrimus, FXStreet, FXCm, FxNice, and HotFores.

The Pitfalls of Unauthorized Platforms

During the pandemic, many of these platforms started offering a derivative product known as contracts for differences (CFD), a financial derivatives trading arrangement where the difference between the open and closing trade prices is cash-settled. The RBI observed misleading advertisements offering forex trading services on over-the-top platforms and gaming apps. These platforms entice users with high returns, employing features akin to casino games.

RBI’s Actions

Over the past two years, the RBI has issued a series of advisories cautioning against unauthorized entities. Recently, it released an alert list of 75 entities involved in forex transactions on unauthorized platforms. While RBI cannot shut them down since they are registered in countries where they are legal, it is collaborating with banks and the government to implement stricter measures to prevent the misuse of banking channels. The Enforcement Directorate has seized the assets of some of these firms like OctaFX.

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