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 central bank's function as the 'lender of last resort' is a critical aspect of its role in maintaining financial stability. It refers to the central bank's responsibility to provide emergency liquidity to commercial banks that are facing a temporary crisis but are otherwise solvent, thereby preventing systemic financial collapse. 1. Lending to trade and industry bodies when they fail to borrow from other sources: The central bank (RBI) typically lends to commercial banks, not directly to non-financial corporations or industry bodies. These entities usually borrow from commercial banks or capital markets. This statement is incorrect. 2. Providing liquidity to the banks having a temporary crisis: This is the precise definition and primary function of the 'lender of last resort'. When commercial banks face a short-term liquidity crunch due to unexpected withdrawals or market disruptions, the central bank steps in to provide funds to ensure they can meet their obligations and prevent a loss of confidence in the banking system. This statement is correct. 3. Lending to governments to finance budgetary deficits: While the RBI can provide Ways and Means Advances (WMAs) to the central and state governments to manage temporary mismatches in their receipts and payments, this function is related to government's fiscal management and treasury operations, not directly to its role as 'lender of last resort' for the banking system. The 'lender of last resort' function specifically pertains to supporting the liquidity of commercial banks. This statement is incorrect in the context of the specific definition. Therefore, only statement 2 accurately describes the central bank's function as the 'lender of last resort'.