What role of RBI is known as lender of last resort?
 
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People have the tendency to hold wealth by means of property, bullion, bonds, etc. A person holding bonds can confront various fluctuations in the market in the form of capital gains or capital losses. The demand for money in order to meet these speculative needs is defined as speculative demand for money. Interest rate represents the opportunity cost of holding the money. The speculative demand for money is inversely related to the interest rate. When interest rate on securities is very high then people expect interest rates to fall in future. To minimize the capital loss, more people will convert their bonds into money, thereby leading to a high speculative demand for money. On the contrary, when interest rates are low, people expect interest rates to rise in future. Hence, to maximize their capital gains, people tend to convert money into bonds, resulting in low speculative demand for money. This shows that the speculative demand for money is inversely related to the interest rate.
People have the tendency to hold wealth by means of property, bullion, bonds, etc. A person holding bonds can confront various fluctuations in the market in the form of capital gains or capital losses. The demand for money in order to meet these speculative needs is defined as speculative demand for money. Interest rate represents the opportunity cost of holding the money. The speculative demand for money is inversely related to the interest rate. When interest rate on securities is very high then people expect interest rates to fall in future. To minimize the capital loss, more people will convert their bonds into money, thereby leading to a high speculative demand for money. On the contrary, when interest rates are low, people expect interest rates to rise in future. Hence, to maximize their capital gains, people tend to convert money into bonds, resulting in low speculative demand for money. This shows that the speculative demand for money is inversely related to the interest rate.


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