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.
- (a) 1 and 2
- (b) 2 only ✓ UPSC's answer
- (c) 2 and 3
- (d) 3 only
Why the answer is (b)
• As lender of last resort the RBI provides emergency liquidity to solvent banks facing a temporary shortage, to prevent bank runs and systemic panic (item 2).
• Instruments include the Marginal Standing Facility, repo/LAF and special liquidity windows during crises.
• Item 1 is wrong: the RBI does not lend directly to trade or industry bodies; that is the role of commercial banks and financial institutions.
• Item 3 is wrong: financing government deficits (ways and means advances or monetisation) is a separate 'banker to government' function, not lender of last resort.
• Hence 2 only, option (b).
Why the other options are wrong
- (a) 1 and 2
- Item 1 is wrong: RBI does not lend to trade and industry bodies.
- (c) 2 and 3
- Item 3 is wrong: deficit financing is the banker-to-government role.
- (d) 3 only
- Item 3 is wrong and item 2 is the correct one.
Asked in the GS Paper I of the UPSC Civil Services Preliminary Examination 2021, held on 10 October 2021. Question and answer key: Union Public Service Commission. Explanation: UPSC Answer Check.