Sensex falters; banks hit by lending rate concerns

MUMBAI (Reuters) - Indians shares fell on Wednesday as banks such as State Bank of India declined on caution ahead of the unveiling of a new methodology for calculating lending rates, with broader sentiment also hit by continued worries about a U.S. rate hike.

Reserve Bank of India Governor Raghuram Rajan, expressing frustration that lenders are not lowering lending rates despite steep rate cuts, said on Tuesday the central bank would soon announce a new methodology that will force them to set lending rates based on their marginal cost of funding.

Meanwhile, some software service exporters and auto firms such as TVS Motor fell as heavy flooding in the southern state of Tamil Nadu shut down factories and paralysed the airport.

Sentiment has also been weak as investors brace for the prospect of a U.S. rate hike in December. Federal Reserve Chair Janet Yellen is due to hold public appearances over the next two days at a high-profile economics group and before a joint committee of Congress.

At the same time, investors are monitoring progress in the current session of parliament as Prime Minister Narendra Modi's government seeks to pass its reform agenda, including a new goods and services tax.

"Markets are cautious on the key tax bill's fate in the ongoing parliament session and expectations of a rate hike by the Fed. Markets would leave all the worries if corporate earnings rebound though in coming quarters," said G. Chokkalingam, founder of Equinomics, a research and fund advisory firm.

The Nifty was down 0.28 percent at 1:50 p.m., while the Sensex fell 0.16 percent.

Lenders led falls on worries about the impact on the sector when some of their freedom in setting rates is taken away.

State Bank of India fell 1.9 percent, while ICICI Bank was down 1.2 percent.

Meanwhile, firms with a presence in Tamil Nadu lost ground after heavy rains over the past two weeks caused widespread flooding. Infosys Ltd fell 1.6 percent.

Among auto-related companies, TVS Motor lost 5.2 percent while Ashok Leyland east 0.2 percent.

(Reporting by Rafael Nam; Additional reporting by Abhishek Vishnoi; Editing by Sunil Nair)