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 fail to 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.

Explicitly defines RBI's 'lender of last resort' role as being ready to lend to commercial banks when they need funds to create credit.

A student could extend this rule by noting that 'lender of last resort' is described here as a bank-to-bank function, so to test the statement they should check whether RBI's statutory/practical lender-of-last-resort operations are ever directed at non-bank trade/industry bodies.

Explains RBI provides short-term loans/advances to banks, supplies emergency liquidity to solvent banks against collateral, and limits such assistance to when market/RBI facilities are exhausted.

Use this pattern (assistance is collateralised and bank-focused) to infer that similar emergency lending to trade/industry would be atypical unless those bodies operate as regulated financial intermediaries or have explicit collateral arrangements and statutory authority.

States RBI is 'banker to the banks' and 'lender of last resort', meaning in times of crisis scheduled commercial banks approach the RBI for assistance.

A student could contrast this targeted description (scheduled commercial banks) with the claim about trade/industry bodies to suspect the latter is outside the standard lender-of-last-resort remit and seek statutory or historical examples.

Notes RBI monitors that banks lend to traders, small industries and borrowers, implying RBI's role in supervising credit allocation but through banks rather than by directly lending to businesses.

A student could use this to argue RBI influences credit to trade/industry indirectly (via banks), so check whether RBI directly extends emergency loans to such bodies or instead uses banks as the channel.

Historical note that before RBI existed, Imperial Bank performed many central-bank-like functions, and later policy sought to correct banks' bias toward trade/large firms—which highlights central bank focus on banking system and mediated credit.

Extend by considering that central-bank functions evolved to regulate banks' lending; thus, a student could examine whether RBI historically/legally stepped outside banking-system interventions to lend directly to industry.

Explicitly defines RBI as 'Lender of Last Resort' — establishes the general central-bank role of providing emergency credit.

A student could note this general role and then check whether that role historically or legally includes lending directly to governments in addition to banks.

Lists RBI functions including 'acts as a banker to the government' and 'acts as a bank to the banking system', separating roles vis‑à‑vis government and banks.

One could use this distinction to investigate whether 'banker to the government' implies routine financing of deficits or only transactional/government-account services.

Defines 'deficit financing' options, explicitly including 'borrowing from the RBI and RBI giving the loans to the Government by printing more currency notes'.

A student could combine this example with knowledge of legal/constitutional constraints to see whether this method is current practice or a theoretical possibility.

States legal/operational constraints: central government 'shall not borrow from the Reserve Bank of India except by way of advances to meet temporary excess of cash disbursements' and 'RBI must not subscribe to primary issues of central government securities from the year 2006-07'.

Using this rule, a student can infer that direct RBI financing of deficits is legally restricted to short-term advances, so they should check the nature and limits of those advances versus deficit funding.

Explains RBI's lender-of-last-resort role toward banks — providing emergency liquidity against collateral at penal rates — clarifying the typical counterpart (banks) and conditions for such lending.

A student can contrast this bank-focused emergency lending practice with the separate, legally constrained mechanisms for lending to the government noted elsewhere to judge whether deficit financing fits the same role.