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.

Answer: B. Only statement 2 is correct. The 'LENDER OF LAST RESORT' (LOLR) function is a CORE CENTRAL BANK ROLE under which the central bank stands ready to provide LIQUIDITY (NOT solvency support) to BANKS facing TEMPORARY LIQUIDITY CRISES — to prevent isolated stress from cascading into a systemic banking panic. Statement 1 is WRONG. LOLR does NOT mean lending to TRADE AND INDUSTRY BODIES directly. The RBI does NOT lend to non-bank commercial enterprises that cannot borrow from other sources. LOLR is strictly a CENTRAL-BANK-TO-COMMERCIAL-BANK function. Statement 2 is CORRECT. The LOLR function precisely refers to PROVIDING LIQUIDITY TO BANKS facing TEMPORARY CRISES. The RBI does this through: - Marginal Standing Facility (MSF) for overnight liquidity at penal rates. - Discretionary support against eligible collateral. - Repo operations during liquidity squeezes. - The Standing Liquidity Facility for primary dealers. This is the textbook LOLR. Statement 3 is WRONG. Lending to governments to finance budgetary DEFICITS is NOT LOLR — it is DEFICIT MONETISATION or MONETARY FINANCING. India ABOLISHED AUTOMATIC MONETISATION in 1997 (FRBM-era reform) and replaced it with Ways and Means Advances (WMA) within strict limits. WMA addresses temporary government cash-flow gaps, not deficits. LOLR has nothing to do with financing government deficits. Source: RBI Master Direction on Marginal Standing Facility / Bagehot's Principle on lender of last resort.