MUMBAI, June 21: A senior official of the Reserve Bank of India (RBI) has expressed concern over the existence of an "active hawala (illegal forex) market" despite substantial liberalisation of the external sector.

The hawala market exists despite substantial liberalisation and drastic reduction in illegal transactions in the foreign exchange market, according to RBI deputy governor Y V Reddy.

Addressing a seminar at the Centre of Economics and Social Sciences (CESS) in Hyderabad, Reddy said ``we have to find reasons for the hawala market.'' There were some consumer goods whose import was subject to quantitative restrictions. ``Perhaps some of them are illegally imported through smuggling using the hawala market,'' he said, adding, ``though the magnitude of such import is very small, it creates scope for hawala.''

There were some procedural bottlenecks, which made it cumbersome for resident Indians to obtain foreign exchange through legal channels for meeting their genuine needs thus giving scope for hawala transactions, Reddy said.

With greater financial integration with global markets, there would be both inflows and outflows of capital, he said, adding ``ideally we should ensure that this happens only through legal channels.''

Reddy also refuted the general belief of a large capital flight from the country. ``On the contrary, there was a reversal in capital flight in the recent past,'' he said.

He said many reports had claimed that there was a capital flight from the country to the tune of over us dollars 10 billion in one single year. ``It's surprising that many in our country accept such estimates as reliable,'' he said.

``In reality it is clear that there is no evidence of large capital flights from the country through legal or illegal channels after the reform process was initiated. On the contrary, there is a possibility of a net reverse capital flight,'' he said.

Reddy said popular perceptions were that the Indian corporates and individuals keep their foreign currency assets abroad without legal sanction. ``It's also said that exporters under invoice their goods and importers over invoice their imports goods and the differences are kept abroad,'' he added.

The main reasons for assets being kept abroad, according to the RBI deputy governor, were the fear of devaluation, high interest rates relative to global levels, financial repression often charecterised by negative or low interest rates and taxes on financial intermediation.

However, there were reasons to believe that there has been substantial reverse capital flight as a result of more realistic exchange rate and lowered direct and indirect taxes, he said.

Reddy said as a result of lowered taxes, exporters and importers might find it unattractive to keep their money abroad or cycle it to avoid taxes. He said it was also likely that with adoption of current account convertibility and liberalised trade, the financing needs of illegal imports have come down.Referring to summggling of gold, Reddy said, though gold import had been liberalised there was still demand for illegal foreign exchange to finance import of gold.

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.