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Can a person buy a foreign currency using the currency of their own country, and then sell it when their currency's value goes down?
Say, I exchanged 44,820 INR for 1,000 USD in 2010, when 44.82 INR = 1 USD. Now that the value of the INR has fallen, I can exchange this 1,000 USD for 72,300 INR. Essentially I have made of profit of 27,480 INR in 8 years doing nothing.
Is this method legal? Are there people who use this method to make money?
Is this method legal? Are there people who use this method to make money?
This depends on the intent. As per Foreign Exchange Management Act, an individual cannot trade in FX. There are specific licenses required and governed by Reserve Bank of India.
However one can hold small amount of Foreign currency in cash; and can make the prescribed profit like you mentioned.
I exchanged 44,820 INR for 1,000 USD in 2010, when 44.82 INR = 1 USD. Now that the value of the INR has fallen, I can exchange this 1,000 USD for 72,300 INR
You have factor inflation and other investment opportunities that would have resulted in similar returns. i.e. Fixed Deposit rates were around 10% in 2010.
I'll answer your two questions in reverse order:
Are there people who use this method to make money?
Yes, definitely. This is called currency trading, and many people and funds do that. You basically make a bet on the evolution of a currency pair, like you would bet on the price of a company stock going up, or on the price of a property going up, etc.
The best known currency trader is probably George Soros with this Quantum Fund, and his bet against the British Pound, in which he made over $1 billion. There are a few other similar examples.
Is this method legal?
This depends a lot on where you are. Some countries have very strict currency controls (you can't exchange your local currency for foreign currency without a lot of justification), others are very liberal and let you do anything, while others still are somewhere in between.
Some countries will also require you to hold some form of licence or authorisation if you want to do that for a living.
I am not sure about whether you can hold the physical currency for that long, but you can trade in futures for the allowed currency pairs by RBI which are USDINR, EURINR, JPYINR, and GBPINR.
They were talking about introducing other currency pairs as well - see NSE introducing Forex Trading in Cross Currency Pairs
