Q.What is meant by 'lender of last resort'? Name two other important functions of the RBI.

Commercial banks that run short of funds have a single institution they can always turn to.

Lender of last resort describes the RBI's role as the ultimate source of funds for a commercial bank that faces a sudden liquidity shortage and cannot obtain funds from any other source (such as the interbank market). By lending to the bank against eligible security, the RBI prevents a temporary cash shortage at one bank from turning into a wider loss of public confidence in the banking system.

Two other important functions of the RBI:

1. Sole right of note issue — the RBI alone is authorised to issue currency notes in India (coins and the one-rupee note are issued by the Government of India), which keeps the currency system uniform and maintains public trust in it. …

Confusing 'lender of last resort' with the RBI's role as 'banker's bank' — the two are related (both concern the RBI's relationship with commercial banks) but 'lender of last resort' specifically …