Economy2021
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
- Providing liquidity to the banks having a temporary
- Lending to governments to finance budgetary deficits
Select the correct answer using the code given below.
Explanation
The term "lender of last resort" refers specifically to the role of the central bank in providing emergency funding to financial institutions facing temporary liquidity crises, thereby maintaining stability in the banking system. This function is critical, as it prevents bank runs and ensures confidence in the financial system. Option 2 captures this definition accurately, while the other options do not align with the central bank's primary objective of safeguarding financial stability through support to banks rather than to trade bodies or governments directly.