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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Answer: B. As lender of last resort, the central bank provides emergency liquidity to banks facing a temporary crunch, to stop panic in the banking system. It does not lend to trade and industry directly, and lending to governments is a separate function (banker to the government). So only 2.
Watch for: Do not mix lender of last resort with RBI's role as banker to the government.
Why the other options are wrong
- A. Wrong because RBI does not lend directly to trade and industry as last resort.
- C. Wrong because lending to governments is its banker-to-government role.
- D. Wrong because lender of last resort is about banks, not government deficits.
Source to check: NCERT Class 12, Introductory Macroeconomics, Chapter 3 Money and Banking; RBI website (Functions)
Answer from the official UPSC key. Written and fact-checked by AI against the official key. Spotted a mistake? Report it.