The BSE Sensex recovered from the day's low to end nearly flat on Monday, led by a rally in state-run banks such as Punjab National Bank on hopes that legislation on banking sector reforms would be passed during the current session of parliament.
Traders said the market was now waiting for fresh cues on reforms from the government to revive the investment cycle to boost growth.
The parliament is expected to amend the banking laws that includes raising the limit on shareholders' voting rights in public and private sector banks, a step seen largely positive towards the government's reform drive.
Rate-sensitive sectors such as banks, real estate and automobile will remain in focus this week as the outcome of two key data points, industrial output and wholesale price index, will set the tone for the central bank's policy meeting on December 18.
"Markets would continue to find FII buying at lower levels due to support from reform measures, cut in interest rate and earnings," said Vivek Mahajan, head of research, Aditya Birla Money.
The benchmark BSE index fell 0.07 percent, or 14.41 points, to end at 19,409.69.
The broader NSE index rose 0.03 percent, or 1.5 points, to end at 5,908.90.
On Monday bank stocks were boosted on expectations of an increase in voting rights and cheap valuations in some banks, Mahajan said.
If approved, the cap on voting rights for investors in private sector banks such as HDFC Bank Ltd and ICICI Bank Ltd would rise to 26 percent from 10 percent, and to 10 percent for government banks such as State Bank of India from just 1 percent now.
Punjab National Bank rose 2.3 percent to 839.7 rupees, Bank of India gained 4.1 percent to 305 rupees, while Bank of Baroda ended 3.8 percent higher at 828.15 rupees.
State-run banks such as Union Bank of India and Oriental Bank of Commerce gained on capital infusion hopes. Union Bank rose 3.9 percent, while Oriental Bank added 5.3 percent.
Likely candidates for banking licences rose as traders were expecting the banking bill to be passed which the Reserve Bank of India said was a pre-condition to invite new banking licences. Reliance Capital Ltd gained 2.8 percent, L&T Finance Holdings Ltd rose 2.7 percent while Mahindra & Mahindra Financial Services Ltd ended up 5.6 percent.
India's No.3 software services provider Wipro Ltd gained 0.5 percent after the company said it would buy L.D. Waxson Group, a Singapore-based consumer goods company, in an all-cash deal worth about $144 million.
Dealers also attributed gains to reports in the Economic Times newspaper that Wipro has bagged a $200-million (10.9 billion rupees) technology service contract in Europe, citing a person with direct knowledge of the negotiations.
Leading the fall, Reliance Industries edged down 0.75 percent on profit-taking after gaining 5.15 percent this month as of Friday's close, while Tata Consultancy Services fell 2.1 percent on outlook concerns.
Cairn India Ltd fell 2 percent after Goldman Sachs downgraded the stock to 'neutral' from 'buy', citing expectations of flat to declining earnings growth, based on its medium-term outlook of gradual moderation in oil prices.
The investment bank also removed the stock from its Asia Pacific buy list.
Shares in Uttar Pradesh-based sugar companies fell after the state raised the price at which sugar mills buy the new season crop by up to 16 per cent to 290 rupees per 100 kg.
Morgan Stanley said in a note the hike in the price of cane in the current sugar season by 2,920 rupees per tonne is much higher than expectations of a 2,820 rupees per tonne hike.
Shares of Balrampur Chini fell 9.5 percent and Bajaj Hindusthan ended 1.4 percent lower, while Shree Renuka Sugars was down 2.5 percent.