In India, the central bank’s function as the ‘lender of last resort’ usually refers to which of the following? 1. Lending to trade and industry bodies when they fail to borrow from other sources 2. Providing liquidity to the banks having a temporary crisis 3. Lending to governments to finance budgetary deficits Select the correct answer using the code given below.

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Correct answer: 2 only. Statement 2 is correct : A “lender of last resort” means that the RBI (also called banker of banks) offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse. By doing so, it helps stabilize the financial system and prevents bank runs and thereby safeguarding public confidence in the banking sector. Indian Economy 279 Statements 1 and 3 are incorrect :  Trade and industry bodies typically borrow from commercial banks or financial markets and not directly from the central bank. The RBI’s role as a lender of last resort is limited to the banking sector to ensure financial stability.  Providing funds to cover government budgetary deficits is not part of the lender-of-last-resort function. The RBI’s support in such cases would fall under separate monetary management activities rather than emergency banking support. 152

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