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CMA Foundation · Fundamentals of Business Economics and Management · Money and Banking

A commercial bank faces a sudden shortage of liquid funds and cannot borrow from any other source. It approaches the RBI for emergency funds against eligible securities. Which central bank function is being exercised by the RBI?

The RBI is acting as banker's bank in its capacity of lender of last resort. When a commercial bank cannot obtain funds from any other source, the RBI supplies emergency credit against eligible securities, which protects the banking system from a liquidity crisis.

  1. ABanker's bank acting as lender of last resortCorrect
  2. BIssuer of currency
  3. CAgent of the government in managing public debt
  4. DRegulator of the stock exchanges

Explanation

When commercial banks cannot raise funds elsewhere, the RBI provides emergency credit against approved securities. This is its role as lender of last resort, part of being the banker's bank. Note issue and public debt management are unrelated to this need, and stock exchanges are regulated by SEBI.

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