When commercial banks face severe liquidity shortages and cannot borrow from the inter-bank market, they approach the RBI as the ___.
- lender of last resort
- Washington
- substitutes
- arbitrage (or resale)
Answer: lender of last resort
This critical function ensures the stability of the financial system. By providing emergency liquidity assistance to solvent but illiquid banks, the RBI prevents bank runs and systemic contagion that could otherwise trigger a broader financial crisis.