Indian lenders slumped in Mumbai trading after the Reserve Bank of India tightened access to cash in an attempt to support the rupee, which fell to a record low earlier this month.

State Bank of India, the nation's largest, fell 3.2 percent to 1,801.25 rupees after the central bank capped banks' access to funds under the liquidity adjustment facility to 0.5 percent of their own net demand and time liabilities starting today. The S&P BSE Bankex index, a gauge of 13 local lenders, slid 4.6 percent.

“The measures announced yesterday have the impact of a hike in reserve ratios,” said Jisha Nair, a Mumbai-based banking analyst at BOB Capital Markets Ltd. said by phone.

“Lending margins will be under pressure as the lenders are not in a position to pass on the higher cost of funds due to weak credit growth.”

The central bank also raised the daily balance requirement for the cash reserve ratio to 99 percent from 70 percent, effective July 27 and separately announced an auction of cash management bills totaling 60 billion rupees ($1 billion) on July 25

Eoin Treacy's view The weakness of the Rupee has become a political liability not least because of the effect this has had on the cost of imported commodities. In the eyes of the administration, crude oil in Rupees moving to new all-time highs this week probably outweighed the effect of tightening monetary conditions on the banking sector.

Duvvuri Subbarao 's term as Governor of the RBI was extended in 2011 and he will now retire on September 4 th. Who will succeed him and the subsequent path taken by the central bank represent uncertainties, particularly for the banking sector. Today's spike higher in 3-month yields weighed heavily on the banks sector.

The Bombay Banking Index failed to sustain the move to new all-time highs in May and encountered resistance in the region of the 200-day MA last week. It extended its decline today and a sustained move above 13,500 would be required to check current scope for additional weakness.

The weakness of the banking sector stands in sharp contrast to the continued strength of the wider stock market. India's Nifty Index is comprised of some truly international businesses that have thrived, often despite government ineptitude. However while the Index is currently testing its highs and has benefitted in nominal terms from the weakness of the Rupee, the banking sector now represents an important headwind. The Index is currently somewhat overbought and at least some consolidation of recent gains appears likely.