The BSE Sensex fell on Tuesday, retreating from a nearly three-year high hit earlier in the session, as blue chips declined ahead of the October 17 deadline to lift the U.S. debt ceiling.
Lenders also led decliners after data showing higher-than-expected headline and retail inflation on Monday sparked concerns the central bank would raise interest rates this month.
Indian shares snapped five day of gains, totalling 3.6 percent as of Monday's close, on profit-taking, dealers said.
Markets are shut on Wednesday for a public holiday.
Also, a Morgan Stanley survey of 95 institutional investors said investors have turned "equal-weight" on Indian stocks with only 21 percent of the investors being "overweight" on India versus 39 percent in February.
"Recent outperformance is weighing. Earnings are important but U.S. debt ceiling risk and RBI policy would take centrestage from here onwards," said G. Chokkalingam, managing director and chief investment officer, Centrum Wealth Management.
The Sensex fell 0.29 percent, or 59.92 points, to end at 20,547.62, earlier hitting its highest intraday level since November 2010.
The Nifty fell 0.39 percent, or 23.65 points, to end at 6,089.05, snapping its five-day winning streak.
Higher odds of a rate hike in October after higher-than-expected headline and retail inflation data on Monday weighed on banking stocks.
India's No.3 lender by assets HDFC Bank fell 2.3 percent after posting quarterly profit growth of 27 percent, in line with analyst estimates, due to losses in its investment portfolio, higher operating expenses and worsening asset quality.
Tata Motors ended 0.4 percent lower on profit taking after making an all-time high of 393.30 rupees on Monday.
IDFC (IDFC.NS) fell 3.4 percent, adding to Monday's 1.4 percent decline, after Deutsche Bank downgraded the stock to "hold" from "buy" and reduced its target price to 110 rupees from 150 rupees citing challenging operating environment.
Wockhardt dropped 5 percent to its daily lower limit for the second day, after Britain's drug authorities revoked their approval for one of its key plants.
However, among gainers, Nestle India rose 3.8 percent after CLSA upgraded the stock to "outperform" from "sell" and raised its price target to 5,850 rupees from 4,900 rupees, saying the consumer goods maker will see "better days ahead".
Tata Consultancy Services ended 0.1 percent higher after earlier making its all-time high of 2,258.85 rupees. TCS later said its September-quarter net profit rose to 47.02 billion rupees.