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.

Selling of bonds by RBI, result in which of the following ?

It decreases money supply in economy

The correct answer is option (1) : It decreases money supply in economy

When the Reserve Bank of India (RBI) sells bonds, it is essentially taking money out of circulation in the economy. Investors and financial institutions buy these bonds from the RBI, and in return, they pay money to the RBI. This transaction reduces the amount of money available in the economy for other uses, thereby decreasing the overall money supply.