So, i am just curious to know what's so special about the number 3? Should the number of moderators be always 3 by virtue of some rule? Can't we ever have 4 or say 5 moderators? If no, what is the reason?
There is no rule that there should be only 3 moderators on a site. There are sites which have just 2 moderators and those which have 25. We can always add more moderators if there is a need for it. That said, usually for Beta sites, 3 moderators are chosen at start by default.
After seeing the comments posted, i am adding another question viz: What will be the circumstances like when the SE Community will decide that 3 moderators are not enough to moderate this site? Does it in anyway depend on some site statistics like traffic etc?
The SE Community as such won't decide about the number of moderators who are needed for a site, it is decided by the sitting moderators of a site and the community managers. The community managers check the overall health of every site periodically and decide whether additional moderators need to be called upon. Additional moderators can also be requested by the moderators of a site, if they feel that there is a need to increase the mod team size (which is usually when there's a large queue at hand, continually for a few months). (And no, it does not depend on traffic, but rather the size of the moderator queue).
The procedure for graduated sites is mentioned on Meta and is the same procedure which we usually follow for the beta sites. From there:
Broadly, it's up to the moderation teams to indicate whether they need additional hands, and how many sets of hands would be ideal.
On beta sites, which do not have elections, Stack Exchange will appoint additional pro-tem moderators if additional help is needed.
Related post - Who do we ask if we want another moderator added during our beta?