Under open market operations, RBI purchases or sells government securities to general public for the purpose of increasing or decreasing the stock of money in an economy. The purchase or sale of securities controls the money in the hands of public as they deposit or withdraw the money from commercial banks. Thus, money creation by commercial banks get affected.
Suppose, the Central Rank purchases securities of Rs 1000 from a bond holdeT with issuing a cheque. The seller of the bond produces this cheque of Rs 1000 to his commercial bank. The commercial bank credits the account of the seller by Rs 1000 and the deposits of the bank goes up by Rs 1000, which increase the credit creation capacity of the banks. Thus, purchase of security increases the money creation of commercial banks and similarly, sale of securities decreases the credit creation of commercial banks. Thus, the Central Bank controls the process of money creation by commercial banks by open market operations.