The emergence of groundwater markets has helped in mitigating inequality in physical access to the groundwater resources, on the one hand, but on the other hand, it may lead to exploitation of the buyers of water, i.e. resource-poor, small farmers. For the sellers of water, it is becoming a remunerative business economically, leading to serious environmental as well as social concerns. The present study conducted in the arid and semiarid zones of Rajasthan has addressed these issues. The study has shown that prevailing terms of water transactions, particularly ‘in-kind’ terms, lead to the over-exploitation of groundwater resources. The credit policies and the power pricing policies of the government also help in the unsustainable and inequitable use of this resource. Water policy ensuring mandatory recharging of the abandoned wells mainly for the sellers of water is the need of hour for the efficient and sustainable use of this scarce natural resource. The analysis of farmers’ decision to participate in water markets employing logit regression has suggested that the farmers having higher fragmented landholdings have higher probability of buying groundwater. Joint ownership of wells is negatively associated with the farmers’ probability of buying groundwater. This implies that the consolidation of holdings or installing cooperative wells may economize the irrigation investment and lead to efficient management of resources of the farmers and sustainable utilization of water. In the national and state water policies as well as in the Model Bill to regulate and control the groundwater resources, this aspect has not been given any emphasis.