In India, the central bank's function as the lender of last resort usually refers to which of the fo

Question

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 sourcesProviding liquidity to the banks having a temporary crisisLending to governments to finance budgetary deficitsSelect the correct answer using the code given below.

Accepted Answer

The Reserve Bank of India was established on April 1, 1935, in accordance with the provisions of the Reserve Bank of India Act, 1934. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.The functions of the Reserve Bank can be categorised as follows:Monetary policyRegulation and supervision of the banking and non-banking financial institutions, including credit information companiesRegulation of money, forex and government securities markets as also certain financial derivativesDebt and cash management for Central and State GovernmentsManagement of foreign exchange reservesForeign exchange management—current and capital account managementBanker to banksBanker to the Central and State GovernmentsOversight of the payment and settlement systemsCurrency managementDevelopmental roleResearch and statisticsAs a Banker to Banks, the Reserve Bank also acts as the lender of the last resort. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much-needed liquidity when no one else is willing to extend credit to that bank. The Reserve Bank extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of the bank, which in turn may also affect other banks and institutions and can have an adverse impact on financial stability and thus on the economy.Source: Vision IAS Economy Study Material Part I