Two instruments of Credit Control are-
(i) Bank Rate Policy : The bank rate is the rate at which the Central Bank lends money to commercial banks. Through changes in bank rate, the Central Bank affects the money supply in the economy.
When credit is to be expanded the Central Bank reduces the bank rate. A low bank rate encourages the banks to keep small proportion of their deposits as reserves, since borrowing from Central Bank is now less costly than before. As a result banks use greater proportion of their funds for giving at loan to borrowers or investors. Thus, money supply increases. The bank rate is lowered during deflation. The reverse occurs during inflation and RBI control credit in the economy.
(ii) Open Market Operations- It refers to the buying and selling of government securities by the Central Bank from/to the public and banks. When Central Bank buys government securities, it adds to cash balances of the economy. If cash balances are increased in the economy, there will be more deposits with commercial banks and hence, more flow of credit and when Central Bank sells government securities it withdraws cash balances from the economy. When cash balances are reduced deposits with commercial banks decreases hence, flow of credit will decrease.