Economics • Banking & FinanceEasy
What is the primary function of the Reserve Bank of India when it acts as the 'Lender of Last Resort'?
A. Providing emergency financial assistance to solvent commercial banks facing temporary liquidity crunches✓ Correct Answer
B. Fixing deposit interest rates for all scheduled commercial banks operating in rural districts
C. Regulating foreign direct investment caps in insurance and telecommunication sectors
D. Auditing annual financial statements of non-banking financial companies
💡 Solution & Explanation
Acting as the lender of last resort, the Reserve Bank of India provides emergency credit to commercial banks that experience sudden liquidity panics despite being fundamentally solvent, preventing systemic banking collapses. This function stabilizes the financial system during runs on banks. It differs from routine monetary policy operations conducted through repo and reverse repo auctions. Commercial banks must pledge eligible securities and pay penal interest rates for such emergency liquidity assistance.
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