Capacitor C also serves for ensuring the stability of the circuit. Since the open-loop transfer function has two poles very close to each other, introducing a dominant pole at node 2 improves stability.
         Can anyone explain why? (i am attaching the circuit)
Thank U
saam

See http://web.engr.oregonstate.edu/~karti/ece422/lec11_16_10.pdf, especially the slides entitled "Adding a Dominant Pole".