The BSE Sensex logged its first weekly decline in four and shed 0.3 percent on Friday, as foreign funds opted to lock in gains, with investor caution seen rising ahead of the Reserve Bank of India's policy review this month.
Top software services exporter Tata Consultancy Services bucked the trend and rallied as much as 4.8 percent, as investors warmed up to its forecast-beating quarterly earnings.
The 30-share BSE index declined 56.28 points to 18,561.92, taking losses for the week to 1.6 percent, with 22 of its components losing ground.
It had gained 5.5 percent over the previous three weeks, buoyed by foreign fund inflows of $2.5 billion since June 23.
But, the inflows have slowed with data showing foreign institutional investors (FIIs) were sellers in at least one day this week, leading to doubts on their near-term moves.
"The near-term outlook is clouded by event risk," said Shankar Char, vice-president and head of sales trading at ICICI Securities.
"Developments in Europe, likely rating agency actions, Reserve Bank of India's policy and domestic earnings – there are too many things. It is all a wait-and-watch."
The 50-share NSE index shed 0.3 percent to 5,581.10 points.
ICICI Securities' Char said investor caution was reflected in anaemic volumes, which on the NSE dropped to 445 million shares from the average 90-day daily volume of 580 million shares.
"I think that FIIs are just shifting money from one geography to another. Does not look like there are a lot of fresh flows," said Sunder Subramaniam, senior manager of sales at brokerage Sharekhan.
"With Europe in trouble, we may benefit in the short run in terms of diversion of flows, but overall risk appetite is coming off," Subramaniam added.
Financials led the drop, with the banking sector index shedding 0.3 percent on concerns the central bank may raise rates at its review on July 26 to tame sticky inflation.
Inflation in Asia's third-largest economy quickened in June, driven by higher prices of manufactured goods and fuel, data showed on Thursday.
Leading private-sector lenders ICICI Bank and top mortgage lender Housing Development Finance Corp dropped 0.8 percent and 1.4 percent respectively.
Top lender State Bank of India bucked the trend and edged 0.3 percent higher.
Investors also closely followed the progress of monsoon rains, critical to India's trillion-dollar economy, and the investigations over Wednesday's bomb blasts in the financial capital, Mumbai.
The monsoon rains were 19 percent below normal in the week to July 13, a slight pick up from a quarter below average in the previous week.
Prime Minister Manmohan Singh vowed late Thursday to bring to justice those behind the triple bomb attacks on Mumbai, and police questioned members of a home-grown Islamist militant group.
TCS closed nearly 2 percent higher, while smaller rival Wipro, which details its earnings on July 20, climbed 0.8 percent.
After the market hours on Thursday, TCS beat estimates with a 28 percent rise in quarterly net profit as western clients increased spending on technology services, but warned of global uncertainty.
"Expansion of addressable market, well-oiled supply engine, market share gains and dominance in leadership verticals will support industry-leading growth even as it is larger in size than peers," Kotak Securities said in a note on TCS.
World stocks as measured by MSCI were down 0.1 percent by 1038 GMT, while emerging market equities were barely changed.
STOCKS THAT MOVED
* Bajaj Auto shed 0.6 percent to 1,422.20 rupees, after the Wall Street Journal reported the second-largest bike maker has shelved a project to develop a low-cost minicar in India for Renault SA and Nissan Motor Co, saying it was commercially unviable.
* Granules India Ltd rose 3.6 percent to 86.85 rupees, after the company said it would create a strategic joint venture with Ajinomoto Omnichem in India.
TOP 3 BY VOLUME on NSE
* Unitech on nearly 27 million shares
* Rushil Decor on 14.5 million shares
* Suzlon Energy on 8.4 million shares