In India, the central bank's function as the 'lender of last resort' usually refers to which of the following?
- Lending to trade and industry bodies when they fail to borrow from other sources
- Providing liquidity to the banks having a temporary crisis
- Lending to governments to finance budgetary deficits Select the correct answer using the code given below.
Correct Answer: Option B
The Reserve Bank of India (RBI), established on April 1, 1935, under the Reserve Bank of India Act, 1934, is India's central bank.
One of the key functions of the RBI is to act as the 'lender of last resort' to banks.
As a 'lender of last resort', the RBI provides liquidity to banks facing temporary liquidity crises. This means the RBI steps in to provide much-needed funds when a solvent bank is unable to borrow from other sources.
This facility is extended to protect the interests of the bank's depositors and to prevent the possible failure of the bank, which could have a ripple effect on other banks and the overall financial stability of the economy.
The RBI does not typically lend directly to trade and industry bodies or to the government to finance budgetary deficits as part of its 'lender of last resort' function.
Statement 1 is incorrect. Statement 2 is correct. Statement 3 is incorrect.
Hence, only statement 2 is correct.