Finance Minister Arun Jaitley, on Thursday, withdrew the clauses from the Finance Bill pertaining to setting up of the proposed Public Debt Management Agency (PDMA) and the amendments to the Reserve Bank of India Act which would have taken away Mint Road's powers to regulate government securities.

The minister said however that the government, in consultation with the Reserve Bank, will prepare a roadmap to pursue a separate debt management agency later in line with the global practice.

"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.

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.

Sources said that the entire chapter on PDMA (Chapter VII) in the Finance Bill is being dropped, in addition to the changes proposed in sections 45U and 45W of the RBI Act. There will also be no changes in the RBI Act as of 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 them.

A senior government official said that RBI will keep its regulatory powers for now, over the next one year, a roadmap will be prepared for a unified financial regulator, with regulatory powers on g-secs, currency, and derivatives likely going to SEBI. These changes may be part of the Finance Bill for 2016-17.

“Essentially, after all these changes, which may only happen next year, the RBI will be left with the powers to only decide monetary policy and regulate the banking system,” the person said.

The Budget 2015-16 proposal to set up PDMA and shift the regulation of government bonds from RBI to market regulator Securities and Exchange Board of India (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 said while referring to the provisions in the Finance Bill for PDMA and regulation of government bonds.

Eventually, the government in consultation with the RBI will work out a scheme for a separate debt management agency in line with the global practice. Sources say there may be a separate PDMA bill in the future, 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 US and UK neither public debt is managed by central bank nor is regulation of GSec, Currency and Derivative with the central bank," Jaitley said.

The continuation of RBI as a debt manager of the government limits the liquidity and fragments the functioning of bond market, he said, adding that the existing structure also creates a conflict of interest as the RBI has to perform the twin role of controlling inflation and keeping the cost of government borrowing low.

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List of amendments

Finance Bill amendments: government withdraws PDMA and Reserve Bank regulatory transfer provisions, Central Bank retains debt-management powers. The Finance Bill, 2015 deleted provisions creating a Public Debt Management Agency and omitted proposed Reserve Bank Act amendments that would reassign regulatory authority over government securities and related instruments; the Central Bank retains regulatory powers for now while the government, in consultation with the Central Bank, will prepare a roadmap to separate debt-management functions and consider shifting regulation of government securities, currency and derivatives to a market regulator by future legislation.