Central Bank Function as Lender of Last Resort

The 'lender of last resort' function specifically defines the central bank's obligation to protect the liquidity and stability of commercial banks. When banks face a sudden cash run or temporary asset-liability mismatch and cannot raise liquidity from the interbank market, the RBI step in to provide funds. It does not refer to commercial commercial bailout of trading firms (Statement 1) or financing fiscal deficits (Statement 2). > The 'lender of last resort' function serves strictly as a liquidity backstop for scheduled banks to protect depositors. Answer: (b).