The Nifty edged lower on Monday to a near seven-month low as software services exporters fell ahead of what is widely expected to be a lacklustre earnings season, and as foreign funds continued to exit local holdings.
The BSE Sensex notched a fourth consecutive session of falls, tracking a decline in Asian shares after disappointing U.S. jobs data and rising geopolitical tension in the Korean peninsula worried global investors.
The outlook for shares remains cautious as foreign institutional investors - a critical part of markets - have now sold $114.3 million worth of stocks in three successive sessions to Friday, according to regulatory data.
However, some analysts said domestic indexes may be oversold in the near term, raising the prospect of a bounce back.
"We need to closely watch the fund flows. There may not be much interest in Indian markets in 1-2 weeks also as fund outflows set in delayed relative to other emerging markets, but eventually fund flows will come in," said Rajesh Cheruvu, chief investment officer for India private banking at RBS.
"The market has broadly factored in muted earnings. Valuations are pretty much attractive and we do not see much downside from hereon," he said.
The broader 50-share Nifty fell 0.19 percent, or 10.30 points, to close at 5,542.95, its lowest close since September 13.
The BSE Sensex declined 0.07 percent, or 12.45 points, to close at 18,437.78, to its lowest close since November 20.
Technology shares led the falls after the poor U.S. non-farm payrolls data raised concerns about the recovery in the U.S. economy, the biggest outsourcing market for the IT firms.
Infosys Ltd fell 1.2 percent ahead of earnings on Friday. Other technology shares like Wipro Ltd edged down 1.3 percent, while Tata Consultancy Services Ltd was 1.2 percent lower.
Indian lenders fell as investors remained cautious on the prospect of future monetary easing on the high current account deficit and retail inflation.
Jefferies initiated coverage on Indian banks noting fundamentals for India's banking sector are unlikely to change much given "tepid" loan and deposit growth, "range-bound" net interest margins and "weak" asset quality.
With earnings likely to remain muted, investors bought defensive stocks like consumer durables and pharmaceuticals.
Hindustan Unilever Ltd rose 1.3 percent, while Sun Pharmaceutical Industries Ltd gained 0.7 percent. Cipla Ltd closed up 2.1 percent.
Infrastructure stocks in oil and gas and power, as well as infrastructure stocks gained as the government showed intent to clear bottlenecks in the sector.
Finance Minister P. Chidambaram met bankers in Mumbai on Friday and identified 215 stalled infrastructure projects for speedy implementation.
Reliance Industries rose 1.2 percent, while Reliance Infrastructure Ltd gained 3.3 percent.
Telecommunications shares rose after the country's top court allowed companies to continue 3G pacts until its next hearing on April 11. Bharti Airtel Ltd closed up 3.8 percent, while Idea Cellular Ltd ended 3.3 percent higher.
Bharat Heavy Electricals Ltd rose 2.6 percent after the company reported better-than-expected provisional earnings.