Select the option which correctly describes the feature of Reverse Repurchase Agreement.
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Sale of securities through an agreement.
When the central bank wants to take money out of the banks for a short while, it sells them securities and agrees to buy them back on a stated date at a stated price. The banks part with money now and get it back later. This deal is a reverse repurchase agreement, or reverse repo: a sale of securities through an agreement, at the reverse repo rate.
It is the opposite of a repo, and unlike an outright sale in the open market, it fixes in advance when the deal will be reversed.
Why the other options are incorrect
Option (1) It is the rate at which RBI provides long term loans to commercial banks. — Incorrect. The rate at which the RBI gives loans to commercial banks is the bank rate; a reverse repo withdraws money from the banks rather than lending to them.
Option (2) Purchase of securities through an agreement. — Incorrect. A purchase of securities with an agreement to sell them back is a repo, the opposite operation, through which the central bank lends money.
Option (4) Purchase of securities in open market. — Incorrect. An outright purchase in the open market is an open market operation with no promise to reverse it, and it injects money into the system.
NCERT (2025-26): “3.4 Policy Tools to Control Money Supply … However, there is another type of operation in which when the central bank buys the security, this agreement of purchase also has specification about date and price of resale of this security. This type of agreement is called a repurchase agreement or repo. The interest rate at which the money is lent in this way is called the repo rate. Similarly, instead of outright sale of securities the central bank may sell the securities through an agreement which has a specification about the date and price at which it will be repurchased. This type of agreement is called a reverse repurchase agreement or reverse repo. The rate at which the money is withdrawn in this manner is called the reverse repo rate.…” |