With the Reserve Bank of India Governor YV Reddy announcing a 50 basis points increase in bank cash reserve ratios to 7% (amount of depositors money that the commercial banks have to park with the RBI), the reaction was immediately felt by the common people—banks have reduced the interest rates they were offering on 1-year fixed deposits from as high as 10% to single digits—government sees it being reduced to as low as 8.5%.

State owned banks were first out of the blocks with Bank of India and Bank of Baroda announcing a reduction in the deposit rates by 0.5 per cent to 9 per cent. Earlier, Allahabad Bank, Indian Bank and Punjab Bank had reduced rates on deposits too.

The banks will now have to maintain their cash reserve ratio (CRR) at 7% with RBI since it is mandatory for them to do so. But, the short-term deposit levels for the common people is no longer as lucrative as it was in the few preceding month and will lead them to look again in investing in mutual funds—many investors had taken their money out of mutual funds and put it in fixed deposits with banks as the interest rates were very high in two digits and there was a virtual guarantee of getting it, while in MFs there was no guarantee of profit.