Interview - RBI to retain powers to regulate government bonds - Sinha

By Douglas Busvine and Rajesh Kumar Singh

NEW DELHI (Reuters) - India will not take away the Reserve Bank of India's (RBI) power to regulate trade in government bonds even as it prepares to remove the central bank's responsibility for managing public debt, the junior finance minister told Reuters in an interview.

Jayant Sinha's comments signal a compromise over the biggest regulatory overhaul in a generation, which had become a source of friction between the RBI and the finance ministry.

The shake-up, proposed by Finance minister Arun Jaitley in February, foresees an independent agency to issue and manage public debt, resolving a conflict of interest the RBI now faces with its formal mandate to control inflation and separately having to manage the government's fundraising.

As part of the plan, the central bank was also to cede its power to regulate trading in government bonds to the Securities and Exchange Board of India (SEBI), the stock market regulator.

Although the changes were moved in parliament after consulting the central bank governor, Raghuram Rajan, the RBI has opposed them, saying they would cripple its ability to function and interfere with monetary policy.

A group of RBI officials wrote to lawmakers and state chief ministers expressing concerns over the changes ahead of a vote in parliament next week, local media reported last week.

"There were some concerns about certain clauses in the finance bill regarding the regulatory functions," Sinha said. "Those have been resolved with the RBI ... regulation will remain as it is."

But the Harvard-educated former fund manager ruled out any change in the plan to set up an independent public debt management agency.

"There is a broad consensus that the public debt management agency should be established and that this public debt management agency should be independent of the RBI as well as the government of India," Sinha said.

The compromise would require Jaitley to amend his budget proposals to ensure the central bank's regulatory powers remain intact.

Sinha also played down reports of differences between the government and the RBI over the creation of a new monetary policy committee, saying they were still in talks on its makeup.

Central bank sources have said the two sides are at odds over the size of the committee, its composition and whether the central bank chief would have veto power.

"We have a very harmonious and good relationship with the RBI," Sinha said. "It is important for India for it to continue to be independent and continue to do the exemplary work that it has been doing."

(Editing by Shri Navaratnam)