Reserve Bank is the only institution which can issue currency. The role of RBI is to lend money to all commercial banks at all times. This function of RBI is called lender of Last Resort. RBI influences money supply by buying or selling of bonds issued by the government in open market. When RBI  buys a government bond in the open market it pays for it by giving a cheque. This cheque increases the total amount of reserve in the economy and thus increases money supply. Selling of bonds by RBI decreases the money supply. When Central Bank buys the security this type of agreement is called repurchase agreement and the rate at which the money is lent in this way is called Repo Rate. RBI also influences money supply by changing the rate at which it gives loans to commercial banks called Bank rate.

Reverse Repo rate is defined as_____________.

Rate at which Central Bank sell securities through an agreement which has specification about rate and price

The correct answer is option (3) : Rate at which Central Bank sell securities through an agreement which has specification about rate and price.

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 The rate at which the money is withdrawn in this manner is called the reverse repo rate.