Relevance of the Hawala market in India 

The Hawala market is an alternative payment channel used to transfer money across countries. This channel is preferred for its relatively low costs, fast settlement and lack of documentation. The existence of this market in India and in other countries is well documented. This mode of payment may be used for transfer of both for legally earned incomes (as in the case of remittances from wages earned abroad) and illegally earned incomes. For an example of the latter, consider the following: during the surge in current account deficit and the consequent exchange rate depreciation in India in 2013, the Union Government and the Central Bank responded by raising the customs tariff on gold and performing open market operations respectively. The effect of the rise on customs tariff was a decline in official gold imports with a simultaneous increase in smuggled gold. During the first quarter of 2013-14, the value of gold seized was worth INR 270 million which was ten times than that reported in 2012. The payment for these forms of gold imports is made through the foreign exchange flows in the informal channels and this is reflected in a surge in hawala margins during the same period. To corroborate this, newspaper reports suggested that margins on hawala transactions have gone up from 0.5 per US$ to 3.5 per US$.

We in Rao and Tandon (2015) on which this One pager is based, ask whether the efficacy of policy interventions is altered in the presence of hawala market and whether alternative instruments are available to achieve the same exchange rate target.