Currency Trading started recently, and it gained popularity in the Indian market. Retail investors in the country are primarily associated with Equity Trading. Forex Trading, or the Currency Market, is a massive trading segment. The primary currency pair that Indian residents or non-resident Indians indulge in is USD to INR.
Understanding the basics
In Equity or Commodity Trading, your capital investment depends on a single entity, like a Stock or Commodity. However, Currency Trading differs in its approach. The Currency Market allows Currency Trading in pairs. This involves two national currencies, one expressed with the second. For example, when Dollar to INR is 0.013, one Dollar equals Rupees 0.013.
- Base Currency: The first national currency mentioned in a currency pair is the Base Currency. In the above example, Dollar is your Base Currency.
- Quote Currency: The second national currency is termed Quote Currency. In this example, INR is the Quote Currency.
Note that the currency pair value is expressed in the Quote Currency terms mandatorily.
Dominance of the US Dollar
If you begin exploring the Currency Market, you will discover that the USD is the most dominant currency. According to a study, USD is an inherent part of the currency pairs that account for over 85% of the Currency Trading volume in the market. The reasons are:
- The economy of the United States is the largest worldwide
- Debt owed to International Monetary Fund is USD denominated
- It is the most stable global currency
- Acts as the world’s reserve currency
Where and how to trade?
Earlier, if you wanted to do Currency Trading, you had to open a Trading Account with an overseas broker and rely on their reference rates to deal with currency pairs. However, currently, it happens through trading platforms such as NSE, BSE, and MCX-SX and is closely regulated to eliminate any irregularities. In India, specifically, Currency Futures Contracts are a popular way to indulge in the Currency Market.
Calculation of profit & loss
In Currency Trading, the gain or loss from a transaction always reflects the Quote Currency, the INR. The conversion to the Base Currency, USD, gets done at the end of the trading session, based on the reference rate provided by the RBI. Note that RBI publishes the reference rate at 12:30 PM daily, depending on which the conversion gets calculated from Quote to Base Currency by investors.
Currency Futures
As for Dollar into Rupee in the Indian market, Currency Futures Contracts are popular. If you believe INR will appreciate USD, you should take a selling position in the INR-USD currency pair. Some of the key features of such trading are:
- INR/USD currency pairs get traded through Call and Put Options, wherein you choose to buy or sell this pair depending on research and instinct.
- The contracts get settled in the future in cash, denominated in the Indian Rupee.
- The minimum lot size to trade is 1,000 of the Base Currency, which is INR.
- The final settlement trade cycle applicable to Currency Futures Market is T+2.
