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:

The correct answer is 2 only.

Explanation:

The Reserve Bank of India (RBI) acts as the central bank of the country. One of its key roles is serving as the 'lender of last resort'.

Let us analyze each statement given in the question:

1. Statement 1 is incorrect: The central bank does not lend directly to trade and industry bodies when they face financial difficulty. Its primary direct financial interface for lending and credit facilities is with commercial banks, financial institutions, and the government, not private commercial entities or industry bodies directly.

2. Statement 2 is correct: When scheduled commercial banks face temporary liquidity shortfalls or financial crises and are unable to obtain funds from other commercial banks or financial markets, the RBI steps in to provide them with liquidity support against eligible securities. This prevents bank runs and maintains overall stability in the financial system. This exact mechanism is known as acting as the 'lender of last resort'.

3. Statement 3 is incorrect: Lending to governments to finance budgetary deficits is part of the RBI's role as a banker, agent, and financial advisor to the government (e.g., through Ways and Means Advances or open market operations), not its function specifically termed as the 'lender of last resort'.

Therefore, only statement 2 correctly describes the central bank's function as the lender of last resort.