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

1. A. 1 and 2
2. B. 2 only
3. C. 2 and 3
4. D. 3 only

Answer: B

Explanation

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Though originally privately owned, since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India. The functions of the Reserve Bank can be categorised as follows: 1. Monetary policy 2. Regulation and supervision of the banking and non-banking financial institutions, including credit information companies 3. Regulation of money, forex and government securities markets as also certain financial derivatives 4. Debt and cash management for Central and State Governments 5. Management of foreign exchange reserves 6 Foreign exchange management—current and capital account management 7. Banker to banks 8. Banker to the Central and State Governments 9. Oversight of the payment and settlement systems 10. Currency management 11. Developmental role 12. Research and statistics As a Banker to Banks, the Reserve Bank also acts as the ‘lender of the last resort’. It can come to the rescue of a bank that is solvent but faces temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank. The Reserve Bank extends this facility to protect the interest of the depositors of the bank and to prevent possible failure of the bank, which in turn may also affect other banks and institutions and can have an adverse impact on financial stability and thus on the economy.