The Union Budget dealt the first major blow by making MFs dividends tax-free. And, the final straw to break the camel's back was the RBI move to bring down interest rates by cutting the bank rate, CRR as well as the repo rate. State Bank of India responded by cutting its prime lending rate and lowering the deposit rates by 100 basis points, much to the chagrin of depositors. With SBI leading the way, most banks -- both in then public and private sector -- are expected to follow suit soon.

An across-the board cut in interest rates will take much of the sheen away from bank deposits. The lower yields as a result of the cut in deposit rates is sure to irk investors. To top it, investments in mutual funds with tax free dividends have become much more lucrative.With good returns, safety and easy liquidity, bank deposits were much sought after the collapse of the non-banking finance sector. Depositors flocked to banks and bank deposits soared to new highs. But all that may change now as depositors rethink their investment preference.

Investors, however, could find solace in the fact that SBI has, so far, only lowered its long-term deposit rates, i.e., for one year and above. Most of the rates in the shorter-end maturities have been left untouched by SBI. For example, the rate on a 15-45 day deposit is still 5 per cent, while that for 46 -179 days has been retained at 6 per cent. However, for 1-2 years, the new rate is 9 per cent compared with 10 per cent earlier. Similarly, the new rate for 3-5 years is 10.50 per cent as against 11.50 per cent earlier. With interest rates in the most of the shorter-end maturities not being very attractive (less than 9 per cent), investors are unlikely to flock to banks.

In effect, therefore, the lure of bank deposits is on itsway out as depositors shy away from FDs to greener pastures.