Mumbai: Indian equities on Tuesday closed 1% lower led by a decline in banking stocks including Yes Bank, RBL Bank, and IndusInd Bank due to concern over of financial irregularities and surging bad loans.

The benchmark Sensex ended 1%, or 361.92 points, lower at 38305.41, while the Nifty declined 1% to 11359.90 points. Intraday, Sensex and Nifty had declined 2% each, but pared some losses after a recovery in shares of auto companies and HDFC twins.

Among banking stocks, Yes Bank slumped over 22%, IndusInd Bank 5.6%, RBL Bank 7.4%, IDFC First Bank 5.2%, Indian Bank 6%, J&K Bank 5%, Punjab National Bank 5%, State Bank of India 5.5%. Union Bank of India and Bank of Baroda fell 3% each.

Barring BSE Consumer durables and oil & gas indices, rest of the sectoral indices compiled by BSE Ltd fell, led by Telecom index which was down 4.4%.

Shares of Indiabulls Housing Finance staged a sharp recovery after falling 11.5%. The stock closed at 282.95 on BSE, up 11% from its previous close after the company informed the exchanges that it has moved a perjury application against petitioners and the Delhi High Court will hear the matter on 24 October.

"We expect that in the near term RBI policy outcome (scheduled on October 04th) will provide some direction to the markets. Further, markets are likely to remain range bound till the beginning of the earnings season from mid-October. Moreover, global developments particularly US-China trade war and crude oil prices may continue to induce volatility in the markets. We suggest investors should stick to stock specific approach," said Ajit Mishra, vice president research, Religare Broking.

Sentiment took a hit after data showed said that India's fiscal deficit stood at 5.54 lakh crore at the end of August, which is 78.7% of the budgeted estimate for the current fiscal. The government faces weak tax revenue and an estimated loss of 1.45 trillion after it cut corporate tax rates last month.

Investors were also worried as S&P Global Ratings on Tuesday significantly reduced India’s growth projection for 2019-20 to 6.3% from 7.1% estimated earlier. It, however, said it expected a “decent, albeit unspectacular" recovery in 2020-21 to 7%.

Vijay Kuppa, co-founder Orowealth, expects auto numbers may see an improvement as many companies sounded optimistic after the government announced a cut in corporate tax cut rates. Also with RBI rate decision around the corner, all eyes will be on revised growth forecast and commentary to boost demand side of the economy.