While traveling to India, it is important to make the right decisions about how much money to carry and how to carry the money for minimizing the risk of theft and fraud.
Carry some hard cash to begin with: It is vital to note that whatever may be your currency – be it USD, Euros, Australian Dollars or Pounds – all currencies can be easily exchanged in lieu of Indian Rupees (INR) in Indian banks, as almost all banks in India provide foreign currency exchange facility. Nonetheless, you should carry a reasonable (not too much) amount of hard rupees while traveling.
Avoid foreign currency exchange at the airport: As soon as you'd step down the airplane in India, you'd come across outlets offering money exchange within the airport premises. It is, however, recommended that, as far as possible, avoid foreign exchange at the airport for the exchange rates at the airport are inordinately dearer. Indeed, what to expect from the mighty expensive real estates, where they sell mineral water bottle worth Rs. 10/- for Rs.100/-!
Transact in foreign currency wherever possible: You can try paying in foreign currency at the hotel you are staying, and even while shopping, because chances are they might accept the foreign currency.
There are several ATMs in India, even in small towns. You can choose to withdraw money in INR from one of these machines, but that would attract transaction charge to the tune of 100-150 INR (about 3 USD or 2 Euros) per transaction and bank charges from your own bank back home. Also, Indian ATMs allow you to withdraw only up to 25,000 INR (450 USD/ 350 Euros) in a day. It is advised to withdraw a large sum in a go to minimize the cost and carry a backup card just in case one card does not work in any ATM in India.
Another option is to carry the old-fashioned travelers' cheque that can be easily exchanged at the nearest bank or authorized money exchanger. Some hotels also accept these instruments.
Using a credit card in India is pertinent only in metropolitan and other big cities. Once out in a small town, credit cards find limited acceptability. In few parts of India (like Kerala) shops allow you to make a fake purchase and withdraw money from the credit card transaction for a small fee. In other words, carrying a credit card may come handy, though not as widely as other instruments.
In India, you may find foreign exchange facility with banks, travel agents, authorized money changers, hotel desks and some unregulated exchange dealers as well. In smaller tourist towns, such money exchange options would be available on every street in small shops. Typically, authorized full-fledged foreign exchange changers offer the best exchange rates along with formal proof of the transaction (receipt of the foreign exchange transaction) that mitigates the risk of counterfeit notes and testifies source of funds. The receipt allows you to reconvert unused INR back to your currency at the airport before leaving, as well as, buy rail tickets on a priority basis on tourists' quota. Unauthorized gray market money exchangers, on the other hand, offer even lower rates but come fraught with risks since you do not get a receipt for the transaction and may be given counterfeit/fake currency in exchange.
At last but never the least, one thing everyone would advise you in one voice is to avoid carrying too much hard currency. It is recommended to carry pre-paid forex card, which is a plastic chip-based travel card with advanced security features and sustained money value. Forex cards are immune to the fluctuations in exchange rates and the value of the forex card freezes based on the exchange rate on the day of loading the card. Not to mention, the card finds wide acceptability, including by taxis, and can always be hot-listed immediately in the event of inadvertent loss of the wallet.