Official reserve sale refers to

The reserve bank sells foreign exchange when there is a deficit.

The correct answer is Option (1) → The reserve bank sells foreign exchange when there is a deficit.

Official reserve sale refers to a situation where the central bank (like the Reserve Bank of India) intervenes in the foreign exchange market by selling foreign currency from its reserves to bridge a deficit in the Balance of Payments

• A deficit in a country's balance of payments means that the demand for foreign currency (to pay for imports, foreign investments, etc.) exceeds the supply of foreign currency (from exports, foreign investment inflows, etc.).

• This excess demand for foreign currency puts downward pressure on the value of the domestic currency (e.g., the Indian Rupee).

• To prevent the domestic currency from depreciating, the central bank (like the Reserve Bank of India) will intervene in the foreign exchange market. It does this by selling its holdings of foreign currency (its official reserves) and buying back its own currency.

• This action increases the supply of foreign currency and reduces the supply of domestic currency, which helps stabilize the exchange rate and finance the balance of payments deficit.