Shares gave up morning gains and eased 0.1 percent on Thursday after lower European markets dented sentiment and sparked uncertainty about foreign fund inflows.
Investors were worried as food inflation in Asia's third-largest economy accelerated in mid-June, maintaining pressure on the central bank to tighten monetary policy at a faster pace.
The Federal Reserve's muted outlook for the U.S. economy added to the pessimism and kept investors edgy, traders said. The Fed acknowledged a faltering pace of U.S. economic recovery on Wednesday as it renewed its vow to hold benchmark interest rates exceptionally low for an extended period.
The 30-share BSE index closed down 0.14 percent, or 25.70 points, at 17,730.24, with 18 of its components losing ground, after rising as much as 0.5 percent in the morning.
Trade was volatile as monthly derivative contracts expired on the National Stock Exchange.Foreign funds have been net buyers of $1.7 billion worth of shares so far this month, helping the BSE index rise 4.6 percent. In May, they had pulled out $2 billion senting the benchmark down 3.5 percent.
It is not yet an established trend that risk appetite has returned. If things go wrong internationally, we are bound to be impacted," said Jigar Shah, vice-president of equity sales at brokerage Motilal Oswal.
Reliance Industries, which has the heaviest weight in the main index, dropped 0.7 percent to 1,051.30 rupees, with some investors not convinced about its drive to boost presence in the U.S. shale gas sector.
The energy major struck a $1.36 billion deal for a 45 percent stake in Pioneer Natural Resources' Eagle Ford shale acreage in south Texas.
Research firm Sanford C. Bernstein said the petrochemicals-to-refining giant seems to be looking at anything that can drive growth such as broadband, U.S. unconventional gas, coal fired power and nuclear power.
"While Reliance has a strong track record of delivering transformational projects outside of their core area of expertise, we question the sustainability of this business model," it said in a note.
Software stocks nudged lower with the sector index easing 0.1 percent after rising 0.7 percent on Wednesday. Outsourcers Tata Consultancy Services and Wipro shed 1.5 percent and 0.8 percent respectively. Infosys, the top sector pick by many analysts, climbed 0.7 percent.
In the broader market, gainers outnumbered losers in the ratio of 1.2:1 on relatively better volume of 428 million shares. The 50-share NSE index shed 0.1 percent to 5,320.60 points.
Europe's FTSEurofirst 300 was down 0.7 percent by 1022 GMT while MSCI's measure of Asian shares other than Japan shed 0.3 percent.