The BSE sensex fell 0.4 % on Wednesday, snapping a two-day rally that sent them up more than 3 %, with investors wary ahead of quarterly corporate results that will begin next week amid slowing economic growth and high interest rates.
A series of rate rises since early 2010 to combat inflation, a weak rupee and sluggish consumer spending are likely to weigh on the results of many companies, while concerns remain about the impact of the euro zone debt crisis on the global economy.
Consumer goods maker Hindustan Unilever Ltd's shares were among the biggest losers and closed 3.1 % lower at 395.45 rupees, its lowest closing level in nearly three weeks.
Brokerage CLSA downgraded the company to "sell" from "under-perform," citing a sharp rise in input costs and a weak macro environment that could hurt pricing power.
The main 30-share BSE index ended down 0.36 % or 56.72 points at 15,882.64, with 18 of its components in the red. It rose 0.2 % in opening deals and later fell as much as 0.7 %.
"We will see a sustained rally in the market only when the key structural issues like inflation and growth are addressed otherwise the pessimism will continue to be there," said Anshu Kapoor, head of private wealth at Edelweiss Wealth Management.
"The earnings season is certainly going to be a negative drag on the markets in the near term due to issues like weak currency, higher input costs and the European debt crisis," he said.
Infosys Ltd, India's No. 2 software exporter, starts the earnings parade on Jan. 12, followed by index heavyweights Larsen & Toubro Ltd and Reliance Industries Ltd.
Bank of America Merrill Lynch said in a note it expected Indian shares to head lower in the first half of this year due to slowing growth, worsening domestic macro fundamentals, deteriorating earning profile and a sluggish global economy.
"Nonetheless, we see the likely fall in equity prices as a 'big' trading opportunity," Vijay Gaba, equity strategist of the brokerage wrote in the report released on Tuesday. "Though a new secular bull market does not appear to be in sight as yet."
Economy will likely grow faster next fiscal year than in 2011/12 because of an improved external environment and a shift in policy focus from containing inflation to growth, a top government adviser said.
A survey showed on Wednesday, services sector grew at its fastest pace in five months in December riding on a surge in new business and expansion in employment, but rising input prices will likely add to inflationary pressures in the coming months.
HSBC said in a research report that the services sector was picking up speed, but rising price pressures meant it was still too early for the central bank to replace inflation with growth as the main policy concern.
Reliance Industries fell 1.2 % to 716.15 rupees on profit booking by institutional investors after the stock rose 4.6 % in the last two sessions, even as the company got approval to develop satellite fields at its key gas block.
Directorate General of Hydrocarbons has cleared Reliance's $1.53 billion plan to develop four satellite fields to boost output at its D6 block and sent it for final government approval, an official source said on Wednesday.
Also, Bloomberg reported, citing people with knowledge of the matter, Reliance was among companies in talks to buy the exploration and production unit of U.S. pipeline company El Paso Corp.
The broader 50-share NSE index ended down 0.33 % at 4,749.65 points. In the broader market, gainers were ahead of losers in the ratio of 1.2:1 on strong volume of more than 567 million shares.
European shares snapped a four-day rally at the open On Wednesday and edged lower ahead of a German debt auction as part of the new year's debt raising by euro zone sovereigns.