UPSC CSE Prelims
Question 98
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:
View correct answer and explanation
Correct answer: B
Correct Option: B (2 only)
Explanation: The lender-of-last-resort role means the RBI supplies emergency liquidity to otherwise viable banks facing temporary funding shortages; it is not ordinary industrial finance or budget financing.
Statement / Pair / Item-wise Analysis:
1. Incorrect / does not qualify - Last-resort liquidity is directed at financial institutions, not trade/industry bodies as such.
2. Correct / qualifies - The RBI can extend emergency liquidity support to banks under defined safeguards.
3. Incorrect / does not qualify - Government deficit financing is a separate monetary/fiscal function.
Option-wise Analysis:
A. Incorrect-includes item 1, which is not valid (Last-resort liquidity is directed at financial institutions, not trade/industry bodies as such).
B. Correct-selects exactly the supported statements/items: 2.
C. Incorrect-includes item 3, which is not valid (Government deficit financing is a separate monetary/fiscal function).
D. Incorrect-includes item 3, which is not valid (Government deficit financing is a separate monetary/fiscal function); omits valid item 2 (The RBI can extend emergency liquidity support to banks under defined safeguards).