Instead of outright sale of securities, the Central Bank may sell 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 _____. The rate at which money is withdrawn in this manner is called ______.
Answer & explanation
Correct answer: option 4
The correct answer is Option (4) → reverse repurchase agreement, reverse repo rate.
A sale of securities with a promise to buy them back is a reverse repurchase agreement, or reverse repo. The rate on it is the reverse repo rate.
Banks pay the central bank for the securities now and get their money back on the fixed date. So for that period, money is withdrawn from the banks.
Option (1) open market operations, bank rate. — Incorrect. Open market operations is the general name for the central bank’s buying and selling of government bonds. This agreement has its own name, reverse repurchase agreement. The bank rate is the rate at which the Reserve Bank gives loans to commercial banks.
Option (2) open market operations, repo rate. — Incorrect. Open market operations is only the general name. The repo rate is the rate on money that the central bank lends, and here money is withdrawn.
Option (3) repurchase agreement, repo rate. — Incorrect. In a repo, the central bank buys a security with a promise to resell it, so it lends money. Here the central bank sells with a promise to buy back, which is the opposite deal.
Option (4) reverse repurchase agreement, reverse repo rate. — Correct. The central bank sells now and buys back later, and this rate applies to the money withdrawn.
Note: A same/similar question was asked in CUET (UG) in the papers below.
| 2026 | 2025 | 2024 | 2023 | 2022 |
| 11-05 S2* | 30-05 S1 | – | – | – |
* A similar question.
NCERT (2026-27): “3.4 Policy Tools to Control Money Supply … Open Market Operations refers to buying and selling of bonds issued by the Government in the open market. This purchase and sale is entrusted to the Central bank on behalf of the Government. 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 reserves in the economy and thus increases the money supply. Selling of a bond by RBI (to private individuals or institutions) leads to reduction in quantity of reserves and hence the money supply. There are two types of open market operations: outright and repo. Outright open market operations are permanent in nature: when the central bank buys these securities (thus injecting money into the system), it is without any promise to sell them later. Similarly, when the central bank sells these securities (thus withdrawing money from the system), it is without any promise to buy them later. As a result, the injection/absorption of the money is of permanent nature. 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.… …The RBI can influence money supply by changing the rate at which it gives loans to the commercial banks. This rate is called the Bank Rate in India.…” |