UPSC Previous Year Question | Prelims GS | 2021

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.

  1. 1 and 2
  2. 2 only
  3. 2 and 3
  4. 3 only

Answer

Correct Answer

2 only

Explanation

As lender of last resort, the central bank provides emergency liquidity to banks facing a temporary crisis so as to prevent systemic contagion. It does not lend to trade and industry bodies directly, and financing government deficits is not part of the lender-of-last-resort function.

Topics: banking & monetary policy, economy, lender of last resort function, reserve bank of india