Mumbai: Shares dropped 0.2% on Tuesday, weighed down by global macro-economic worries, while banks stocks fell on concerns rising interest rates would hit demand for loans.

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Shares in ICICI Bank, the No. 2 lender, led the losses falling for a second day after it raised lending rates by 50 basis points. The stock fell 3.5% at Rs1,110.30, taking the fall over two days to 6%.

Top lender State Bank of India shed nearly 3% to Rs2,865.40 on worries that its net interest margin, a key gauge of profitability, could come under pressure after it raised deposit rates by up to 150 basis points.

Macquarie said the “clear asymmetric" rate increases the banks were witnessing are bound to exert pressure on margins, particularly for state-run banks. It expected earnings downgrade in the state-run banks in the near term due to margin pressure.

The banking sector index ended 2.9% lower.

The euro zone’s debt crisis and speculation over a possible interest rate rise in China also weighed on investor sentiment, traders said.

China’s central bank may raise rates again this weekend as it tries to contain inflationary pressures, official newspaper the China Securities Journal reported on Tuesday.

The BSE 30-share index Sensex shed 0.23% to 19,934.64, with 19 of its components declining.

“In the very short term, there is still some downside left because confidence has been shaken after the scams," Rajesh Agarwal, head of research at Eastern Financiers, said referring to recent corruption scandals that have hit the country.

Foreign funds have invested more than $29 billion in Indian equities so far this year, driving the benchmark BSE index about 14% higher.

India’s economy could grow by nine percent this fiscal year, the highest in three years, according to a review of the economy by the finance ministry, highlighting how the economy is recovering fast from the global downturn.

“The market trend in the near term will be determined by the corporate earnings, which are expected to be good for most sectors," Neeraj Dewan, director at brokerage Quantum Securities, said.

Shares in Tata Steel closed up 0.7% at Rs639.60 amid speculation over its future course of action after Rio Tinto made a $3.5 billion bid approach for Africa-focused Riversdale Mining.

Tata Steel, the world’s seventh-largest steelmaker by output, is the biggest shareholder in Riversdale.

In the broader market, losers were 2.4 times the number of gainers on volume of 338 million shares.

The broader NSE 50-share index Nifty ended 0.26% lower at 5,976.55.