Private sector banking names that were hit badly in trade were ICICI Bank, which shed 3 per cent, while IndusInd Bank dropped 7 per cent and Yes Bank followed with losses of 14%.
Every single banking stock was trading deep in the red with PSU banking stocks like Canara Bank dropping 4 per cent, while Bank of Baroda and Bank of India shed more then 3 per cent each.
Other banking stocks that also declined were Axis Bank and HDFC Bank.
Recent measures taken by the RBI to prevent the rout of the rupee, by reducing liquidity in the banking system left investors worried that it would squeeze the margins of banks.
The Indian central bank stunned markets recently by hiking the marginal standing facility for banks (MSF) to 10.25%, indirectly pushing interest rates higher.
Under the MSF banks were borrowing from the RBI at repo rate, plus 1 per cent, which effectively meant 8.25 per cent. But, with effect from July 17, banks would now have to borrow at 10.25 per cent, which is a good 2 per cent over and above the existing rates.
Additionally, RBI also tightened rules on the cash reserve ratio (CRR), or the percentage of deposits banks must keep in cash with the central banks.