Jaitley drops plans to strip RBI of powers to regulate G-Secs, for now

The finance ministry has backed off from its plans, for the time being at least, to strip the Reserve Bank of India (RBI) of its powers to regulate government bonds and instead set up a separate body to handle public debt.

Finance minister Arun Jaitley today said the proposal stands withdrawn from the Finance Bill, 2015. But he said the government, in consultation with the RBI, will prepare a roadmap for a separate debt management agency later.

Jaitley, while presenting the union budget for the 2015-16 fiscal, had proposed to set up a Public Debt Management Agency (PDMA) and empower market regulator Securities and Exchange Board of India (Sebi) with the role of regulating government bonds as well.

The proposal had generated a lot of heat, with the RBI raising concerns and questioning the move. The finance ministry, however, plans to go ahead with the proposal as it would give it more freedom in raising resources from the market.

"Since the RBI has been handling public debt management, the government in consultation with the RBI will prepare a detailed roadmap separating the debt management function and the market infrastructure from the RBI and having a unified financial market," Jaitley said.

The finance minister said this while initiating the debate on the Finance Bill in the Lok Sabha.

The Reserve Bank had, in 2000-01, proposed the separation of government debt from RBI, which is vested with monetary policy formulation stating that there is conflict of interest in the central bank involving in both bond issue and monetary policy formulation.

Subsequently, several independent committees, including one under the present RBI governor, have recommended the setting up of an independent debt management agency, which is separate from the government as well as the RBI.

"The Persi Mistry report of 2007 and the Raghuram Rajan Committee report of 2009 have both strongly argued for separating the debt management functions from the RBI. The recommendations are well founded," Jaitley said.

While governor Raghuram Rajan has avoided criticising the government move, deputy governor S S Mundra had last month called for a review of the decision to set up a new agency to manage government debt.

The House is expected to approve the Finance Bill later in the day, giving effect to the tax proposals.