Given below are two statements: one is labelled as Assertion (A) and the other is labelled as Reason (R).
Assertion (A): The Reserve Bank of India is called the lender of last resort.
Reason (R): Commercial banks keep a part of their reserves as deposits with the Reserve Bank of India.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 2
The correct answer is Option (2) → Both (A) and (R) are true but (R) is not the correct explanation of (A).
Both statements are true. R tells us where banks keep their reserves. It does not say why the RBI is the bank that banks turn to for funds.
Assertion (A): The Reserve Bank of India is called the lender of last resort. — True. Commercial banks can turn to the RBI for funds when they need them.
Reason (R): Commercial banks keep a part of their reserves as deposits with the Reserve Bank of India. — True. Reserves are the deposits which commercial banks keep with the RBI, together with their cash.
Why R does not explain A?
R is about banks keeping money with the RBI. A is about the RBI lending money to banks. Holding their deposits does not make the RBI ready to lend to them.
The real explanation of A: the RBI is ready to lend to banks at all times. Because of this role it is called the lender of last resort.
NCERT (2026-27): “3.3 MONEY CREATION BY BANKING SYSTEM … Reserves are deposits which commercial banks keep with the Central bank, Reserve Bank of India (RBI) and its cash.” “Central bank … Central bank has several important functions. It issues the currency of the country. It controls money supply of the country through various methods, like bank rate, open market operations and variations in reserve ratios. It acts as a banker to the government. It is the custodian of the foreign exchange reserves of the economy. It also acts as a bank to the banking system, which is discussed in detail later.” “3.4 POLICY TOOLS TO CONTROL MONEY SUPPLY Reserve Bank is the only institution which can issue currency. When commercial banks need more funds in order to be able to create more credit, they may go to market for such funds or go to the Central Bank. Central bank provides them funds through various instruments. This role of RBI, that of being ready to lend to banks at all times is another important function of the central bank, and due to this central bank is said to be the lender of last resort.” |