Given below are two statements:
Statement I: Outright open market operations are permanent, as the central bank buys or sells securities with no promise to reverse the deal.
Statement II: In a reverse repo, the central bank buys securities with an agreement to sell them back at a fixed date and price.
In the light of the above statements, choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 3
The correct answer is Option (3) → Statement I is correct but Statement II is incorrect.
Statement I describes outright operations correctly. Statement II gives the meaning of a repo but calls it a reverse repo.
Statement I: Outright open market operations are permanent, as the central bank buys or sells securities with no promise to reverse the deal. — Correct. In an outright deal the RBI buys or sells without any promise to undo it later.
Statement II: In a reverse repo, the central bank buys securities with an agreement to sell them back at a fixed date and price. — Incorrect. A purchase with an agreed date and price of resale is a repo. In a reverse repo, the RBI sells securities and agrees to buy them back later.
NCERT (2026-27): “3.4 Policy Tools to Control Money Supply … Another important tool by which the RBI also influences money supply is Open Market Operations. Open Market Operations refers to buying and selling of bonds issued by the Government in the open market. … 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. …” |