By Rajesh Kumar Singh and Manoj Kumar
NEW DELHI (Reuters) - India on Thursday put on hold its biggest overhaul of financial regulation in a generation, following pushback against its plans to strip the central bank of authority to regulate the government bond market and manage public debt.
The climbdown, ahead of a vote in the lower house of parliament, marks a victory for the Reserve Bank of India (RBI), which opposed the changes, saying they would cripple it and interfere with monetary policy.
Finance Minister Arun Jaitley had proposed the changes when he unveiled India's annual budget in February, with the aim of resolving a conflict of interest the RBI now faces between its formal mandate to control inflation and separately manage the government's fundraising.
The government's thinking was that the overhaul would help lower borrowing costs, expand bond markets by attracting retail investors and improve the transmission of monetary policy.
On Thursday, even before the lower house began a discussion on the changes, Jaitley asked the speaker of the house to strike them out of the finance bill. But he also reiterated the need to set up an independent agency to issue, and manage, public debt.
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"(It) creates a conflict of interest between the RBI's role of controlling inflation ... and its interest in keeping interest rates low to reduce cost of borrowing for the government," he told lawmakers in the lower house.
"(It) perpetuates the conflict of interest within the RBI from being a regulator of government securities and simultaneously being both a trader in government securities."
However, he didn't offer any reason for the rollback.
The government would now consult the RBI and come up with a detailed roadmap for a new debt management agency, Jaitley said, without offering any timeline.
Although the regulatory overhaul was moved in parliament after consulting the central bank governor, Raghuram Rajan, it had become a source of friction between the RBI and the finance ministry.
A group of RBI officials wrote to lawmakers and state chief ministers expressing concern over the changes ahead of a vote in parliament next week, media have reported.
In a sign of a compromise, junior finance minister Jayant Sinha told Reuters on Tuesday the central bank would not lose its powers to regulate trade in government bonds.
(Additional reporting by Nigam Prusty in NEW DELHI and Neha Dasgupta in MUMBAI; Editing by Clarence Fernandez)