RBI had the previous night come out with measures aimed at restoring stability in the foreign exchange market, including curbing borrowing by banks, and drained off Rs. 12,000 crore.
Following RBI's cue, the rupee gained 68 paise to 59.21 against the dollar in intra-day trade, before closing at 59.31 against Monday's close of 59.89.
Bank stocks slumped on concern that the RBI's latest measures would spark an interest rate increase, besides making it costlier for lenders and financial companies to raise short-term funds.
While Yes Bank slumped 9.9%, IndusInd Bank ended 7.9% lower. ICICI Bank fell 5.4% and HDFC Bank lost 2.4%.
Shares in financial firms also slumped including IDFC (-7.2%) and HDFC (-3.8%).
Rate-sensitive auto, realty and capital goods stocks also declined.
Foreign institutional investors sold a net Rs. 357 crore of shares, according to the BSE website.