“Since RBI has been handling public debt management, the government in consultation with RBI will prepare a detailed road map separating the debt management function and the market infrastructure from RBI and having a unified financial market,” Jaitley said.
He made these remarks while initiating the debate on the Finance Bill in the Lok Sabha. The House is expected to approve the Bill later in the day, giving effect to the tax proposals.
Senior government officials also said while RBI would keep its regulatory powers for now, a road map would be prepared over the next one year for a unified financial regulator, with regulatory powers on G-secs, currency and derivatives likely going to the Securities and Exchange Board of India (Sebi). These changes might be included in the Finance Bill for 2016-17.
“Essentially, after all these changes, which may only happen next year, RBI will be left with the powers to only decide monetary policy and regulate the banking system,” the person said.
Sources said the entire chapter on the public debt management agency (chapter seven) in the Finance Bill is being dropped, in addition to the changes proposed in Sections 45U and 45W of the RBI Act. There will be no changes in the RBI Act for now. While Section 45U deals with definitions of terms such as securities, money market instruments, derivatives, repo and reverse repo, Section 45W deals with RBI's power to regulate such instruments and decide on repurchase rates for these.
The Budget 2015-16 proposal to set up such an agency and shift the regulation of G-secs from RBI to Sebi generated lot of controversy, with the central bank raising concerns and questioning the timing of the move.
"It is being decided to delete the PDMA provisions from the Finance Bill for this financial year," Jaitley said. "There are six different provisions which we are omitting," he said, while referring to the provisions in the Finance Bill for the agency and regulation of government bonds.
Eventually, the government and RBI will work out a scheme for a separate debt management agency. Sources said there might be a separate Bill for agency later, though it was unlikely to be tabled anytime this year.
"Having an independent debt management office is also the best international practice. In countries like the US and the UK neither public debt is managed by central bank nor is regulation of G-sec, currency and derivative with the central bank," Jaitley said.
Keeping RBI as the debt manager for the government limits liquidity and fragments the functioning of bond market, he said, adding the current structure also created a conflict of interest as RBI had to perform the twin role of controlling inflation and keeping the cost of government borrowing low.