Question

Q. For which of the following reasons the Reserve Bank of India (RBI) is called as the ‘lender of last resort’?

• A.
  RBI formulates the fiscal policy of the Government and manages the fiscal deficit for the Government.
• B.
  Insolvent Multi National Companies can avail the loans from the RBI.
• C.
  RBI finances the small and marginal farmers in the country affected by natural calamities.
• D.
  RBI comes to the rescue of a bank that is facing temporary liquidity problems.

Answer 1

The correct option is D

RBI comes to the rescue of a bank that is facing temporary liquidity problems.
Explanation:
The Reserve Bank of India as a ‘Banker to Banks’ will act as the ‘lender of the last resort’. This means that RBI can rescue a bank that is facing temporary liquidity problems by supplying it with much needed liquidity when no one else is willing to extend credit to that bank. This is because to protect the interest of the depositors of the bank and to prevent possible spillover effects on the economy.