The provision sought a new body to manage public debt, which is nothing but the government of India's borrowing. The RBI does it now. The Central Bank would also lose its power to regulate the market in government securities. The change was being seen as the biggest in financial regulation in a decade.
Jaitley said there was a conflict in the RBI's role of "controlling inflation ... and its interest in keeping interest rates low to reduce cost of borrowing for the government". He did not give any reasons for dropping the proposal.
Whatever be the reason, the decision to drop the proposal could not have come sooner.
The Reserve Bank of India, under successive governors, has proved to be a bulwark of the country's system, one that actually works effectively. It deserves much credit for limiting the impact of the 2008 financial crisis on the country in spite of a change of governors a mere 11 days before Lehman's collapse: Duvvuri Subbarao took charge from Yaga Venugopal Reddy on September 4, 2008.
It says something for the institution that it carries on regardless, much like Kipling's immortal lines to his son: If you can keep your head when all about you are losing theirs…
Long story short: listen to the Americans. Their old adage may be a reason they have done so well as a country: if it ain't broke, don't fix it.
Certainly not when so much else is broke around you.