The Bombay Stock Exchange (BSE) Sensex shed 1.4% on Tuesday, with energy giant Reliance Industries and financials leading the decline, as world stocks hit a 2-½ week low as investors were cautious ahead of bank repayments of emergency loan to the European Central Bank later this week.

Banks must repay e442 billion to the ECB on Thursday, leaving a potential liquidity shortfall in the financial system of over e100 billion.

Billionaire Mukesh Ambani-led Reliance Industries, which has the highest weight on the Sensex, dropped 1.9%, after rallying 3.5% over the two previous sessions.

The 30-share BSE index closed 1.35%, or 240.17 points, lower at 17,534.09, its lowest close in two weeks. “Over the long term, the picture looks positive for Indian market considering the economic growth. (Fuel) deregulation move by the government will also help cut fiscal deficit,” said Jigar Shah, vice-president of equity sales at brokerage Motilal Oswal. “In the near-term, we continue to follow global cues. The end to euro zone woes is not in sight as yet.”

SBI set its base rate for loans at 7.5%, as part of a new rule that requires banks to set their minimum lending rates. RBI introduced the new lending rate system or the base rate, to ensure that larger borrowers do not bargain for cheaper rates from banks, distorting their asset-liability management.

“Expectations of a rate hike are weighing on bank stocks. They are not likely to see a meaningful rise any time soon,” said Mr Shah.

Prime Minister Manmohan Singh said on Tuesday the government will end controls on diesel prices. The move is seen exerting pressure on inflation. SBI shed 0.3% while ICICI Bank and HDFC Bank dropped 2.3% and 2.7%, respectively.

Tata Motors shed 2.4% on fears of equity dilution and lower earnings per share after it approved raising $1 billion through equity and convertible bonds to reduce debt and for expansion. Edelweiss Securities said Tata Motors remains a high-risk, high-return stock with its high financial leverage and potential equity dilution.

Metal producers declined as base metal prices fell in London as concerns about economic recovery weighed. AstraZeneca Pharma India jumped 20% to Rs 1,207.05 on a voluntary delisting plan.