The Sensex ended marginally higher after touching its lowest in 2013 intraday on Monday, as technology firms such as Infosys gained on hopes the budget would provide incentives to exporters, while oil & gas company ONGC fell on worries about a potentially higher oil subsidy burden.
Non-banking financial companies rose after the central bank issued guidelines allowing companies to apply for banking licences, while mid- and small-sized stocks slumped with Core Education & Technologies Ltd losing as much as 66.5 percent, on speculation that pledged shares of these companies were being sold off.
Indian shares will be closely monitoring the 2013/14 budget to be announced on February 28.
All eyes will be on how the finance minister will manage to meet the government's 4.8 percent fiscal deficit target for 2013/14, while still trying to revive growth amid persistent inflation, and with general elections expected next year.
"The markets are quite jittery ahead of the budget and lack of any data inputs is also making the markets very volatile," said Jagannadham Thunuguntla, head of research, SMC Investments and Advisors Ltd.
The food security bill will be a challenge for the overall fiscal management, Thunuguntla added.
The Sensex rose 0.08 percent, or 14.68 points, to end at 19,331.69, not far off 2013 closing lows hit on Friday.
The broader Nifty rose 0.08 percent, or 4.45 points, to end at 5,854.75.
Infosys Ltd gained 2.7 percent, while Tata Consultancy Services Ltd rose 1.3 percent on hopes of incentives for exporters in the 2013/14 budget to be unveiled on February 28.
J.P.Morgan also raised its target price on Infosys to 3,200 rupees from 3,100 rupees while maintaining its "buy" rating.
The brokerage said Infosys "is likely turning the corner", given the Indian software services exporter is proving more flexible in winning deals, embracing "a more realistic" margin profile and trying to re-engage with employees.
Generic drugmaker Ranbaxy Laboratories Ltd gained 4.9 percent after it said on Friday it would resume production of its version of Pfizer's cholesterol fighter Lipitor for sale in the United States after resolving the issues that led to a November recall.
HSBC raised its rating on Ranbaxy to "overweight" from "underweight" after the drugmaker' s announcement on Lipitor.
Shares in non-banking financial companies gained after the RBI issued guidelines allowing any business sector to apply for banking licences.
Mahindra and Mahindra Financial Services ended 0.5 percent higher, while IDFC Ltd rose 0.7 percent.
However, Oil and Natural Gas Corp fell 1.85 percent on expectations of higher oil subsidy burden from the 2013/14 budget, dealers said.
Mid- and small-sized stocks slumped, with Welspun Corp falling as much as 28 percent and Core Education & Technologies losing as much as 66.5 percent, on speculation that the pledged shares of these companies were being sold off, dealers said.
Controlling stakeholders of Indian companies often receive loans from financial institutions, pledging their shares as collateral, making these stocks vulnerable to any rumours of liquidations.
The total value of pledged stocks in India reached 1.5 trillion rupees as of the end of December, according to a Morgan Stanley report last week, marking a 5 percent increase from the July-September quarter.
Welded steel pipe maker Welspun Corp fell 20.4 percent, while Shipbuilder ABG Shipyard Ltd and Aanjaneya Lifecare Ltd fell by their daily limit of 20 percent, while Core Education & Technologies Ltd ended 62.4 percent down.
Shares in Jet Airways Ltd fell 4.2 percent, adding to 14.5 percent fall seen last week, on continued concerns about whether the carrier will clinch a deal to sell its stake to Abu Dhabi-based carrier Etihad Airways.