Prelims 2021 · Economy · Question 15
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 sources
- Providing liquidity to the banks having a temporary crisis
- Lending to governments to finance budgetary deficits
Select the correct answer using the code given below.
Answer
2 only
1. Lending to trade and industry bodies when they fail to borrow from other sources — This is not the usual meaning of lender of last resort. The central bank mainly backstops the banking system, not private trade/industry bodies. Verdict: Incorrect.
2. Providing liquidity to the banks having a temporary crisis — This is the classic function of the central bank as lender of last resort: it provides emergency liquidity to solvent banks facing temporary shortages. Verdict: Correct.
3. Lending to governments to finance budgetary deficits — This relates to government borrowing/deficit financing, not the specific LOLR function. In India, automatic monetization of deficits has also been discontinued. Verdict: Incorrect.
Therefore, only statement 2 is correct.