When the central bank buys the security, this agreement of purchase also has specifications about the date and price of resale of this security. The rate at which these agreements are carried out is known as ?
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → Repo Rate
A commercial bank short of money can sell a security to the central bank, with an agreement that it will buy it back on a fixed date at a fixed price. Such a repurchase agreement, or repo, is really a loan from the central bank, and the interest rate on it is the repo rate. A higher repo rate makes this borrowing dearer for the banks and so reduces the money supply.
Why the other options are incorrect
Option (2) Reverse Repo Rate — Incorrect. In a reverse repo the central bank sells securities with an agreement to buy them back. The rate there is the reverse repo rate, the rate the central bank pays to absorb the banks’ money.
Option (3) Bank Rate — Incorrect. The bank rate is the rate at which the central bank lends to commercial banks without any purchase and resale of securities.
Option (4) Deposit Rate — Incorrect. The deposit rate is what commercial banks pay their depositors. It is not the rate of the central bank’s dealings in securities.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 13-05 S2 06-06 S1* | – | – | – | – |
* A similar question.
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 The rate at which the money is withdrawn in this manner is called the reverse repo rate.…” |