Question
Q15. 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 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
C. 2 and 3
D. 3 only
Answer: B
Detailed Explanation
The Reserve Bank of India (RBI) has historically financed government budget deficits by purchasing government securities, which effectively means printing new money—a process known as “monetisation of the deficit”. This was a common practice until 1997, when automatic monetisation through ad-hoc treasury bills was phased out. The Fiscal Responsibility and Budget Management (FRBM) Act, 2003, later barred the RBI from directly funding government deficits, except under special circumstances allowed by an “escape clause”
• A lender of last resort (LoR) is an institution, usually a country’s central bank, that offers loans to banks or other eligible institutions that are experiencing financial difficulty or are considered highly risky or near collapse.
• Functions of RBI
o Monetary Management
o Issuer of Currency
o Banker and Debt Manager to Government
o Banker to Banks
o Financial Regulation and Supervision
o Foreign Exchange Reserves Management
o Market Operations
o Payment and Settlement Systems
o Developmental Role
o Research and Data Dissemination
