Consider the following statements about the tools of the RBI:
(A) In a repo, the RBI buys securities with an agreement to resell them at a fixed date and price.
(B) A rise in the bank rate raises the reserves held by commercial banks.
(C) An outright purchase of bonds by the RBI injects money into the system permanently.
(D) A reverse repo injects money into the system.
Choose the correct answer from the options given below:
Answer & explanation
Correct answer: option 1
The correct answer is Option (1) → (A) and (C) only
Each tool either adds reserves (injects money) or takes reserves out (withdraws money).
(A) In a repo, the RBI buys securities with an agreement to resell them at a fixed date and price. — Correct. A repo is a purchase with a promise to resell at a set date and price.
(B) A rise in the bank rate raises the reserves held by commercial banks. — Incorrect. A higher bank rate makes borrowing from the RBI dearer, so it reduces the reserves of commercial banks.
(C) An outright purchase of bonds by the RBI injects money into the system permanently. — Correct. There is no promise to sell back, so the injection is permanent.
(D) A reverse repo injects money into the system. — Incorrect. In a reverse repo the RBI sells securities for a time, so money is withdrawn.
NCERT (2026-27): “3.4 Policy Tools to Control 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 The rate at which the money is withdrawn in this manner is called the reverse repo rate.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. By increasing the bank rate, loans taken by commercial banks become more expensive; this reduces the reserves held by the commercial bank and hence decreases money supply. …” |