Indian shares fell on Thursday, snapping a six-day record-setting rally, as profit-taking hit IT stocks while large state-run lenders slid as they stood to receive less money than expected from a government recapitalisation plan.
Bonds also fell, sending the benchmark 10-year yield up 4 basis points to 7.48 percent, after oil prices rallied on heavy volume, boosted by a record 10th straight weekly decline in U.S. crude inventories.
But the rupee strengthened to 63.49 per dollar from its previous close of 63.70, tracking a rally in Asian currencies after U.S. Treasury Secretary Steven Mnuchin welcomed a weaker dollar, calling it good for trade, in a departure from traditional U.S. policy.
Overall sentiment was cautious as investors awaited the annual budget for the fiscal year starting in April to be unveiled on Feb. 1.
Expiry of monthly derivative contracts at the end of the session, after indexes hit record highs in each of the six previous sessions, also kept sentiment in check.
"Markets are usually volatile on the settlement date for futures and options contracts. Now, markets are waiting for the annual budget," said R.K. Gupta, managing director at Taurus Asset Management.
The Nifty was down 0.22 percent at 11,061.75 as of 0616 GMT, but was set to end the week 1.53 percent higher.
The benchmark Sensex was 0.26 percent lower at 36,065.95, but was on track to post a weekly gain of 1.57 percent.
Both the indexes were on course to post their fourth weekly gain this year.
Indian share markets will be closed on Friday for a public holiday.
Shares in State Bank of India and other big state-run banks fell as they stood to receive less money than investors had expected from the government's much-awaited recapitalisation plan.
India's government pledged on Wednesday to inject nearly $14 billion combined into all but one state-run lender by March in return for them implementing reforms, in a bid to boost lending and tackle a record bad debt problem.
SBI shares were the biggest drag on the broader NSE index, falling as much as 4.5 percent.
Investors booked profits in IT stocks, with the Nifty IT index slipping 1.9 percent after gaining in the last seven sessions. Infosys Ltd fell 2 percent while Tata Consultancy Services Ltd slid 2.2 percent.
Meanwhile, Biocon Ltd fell as much as 5.4 percent after posting a 46 percent drop in third-quarter profit.