The broader Nifty fell 1.7 per cent for the month, marking its second consecutive monthly fall, after the RBI's measures to raise short-term interest rates to defend the rupee raised worries about the economic costs.
The Nifty fell 0.23 per cent, or 13.05 points, to end at 5,742, marking its sixth consecutive session of falls to its lowest close since June 27.
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The benchmark BSE Sensex edged down 0.01 per cent, or 2.64 points, to end at 19,345.70, after earlier falling 1.1 per cent in the day.
Foreign investors have sold a net 60.86 billion rupees of shares this month, their second consecutive monthly sale as fears of an early tapering of U.S. stimulus have sparked selling in emerging markets.
Investors will focus on the outcome of the Federal Reserve's meeting later in the day, with markets awaiting more clues about when the U.S. central bank will start reducing its bond purchases.
Over the long term, investors will also focus on how policy makers defend the currency, which despite the RBI's measures remain near a record low.
Finance Minister P. Chidambaram vowed to take action to contain the country's current account deficit, the biggest stress on the rupee, and bring in foreign inflows, while RBI Governor Duvvuri Subbarao pledged to stick to its defence measures.
"Although stimulus-tapering is now expected to be slow and gradual, Federal Reserve's tone will decide the direction of the equities in the near term," said G. Chokkalingam, managing director and chief investment officer, at Centrum Wealth Management.
The rupee has a structural problem so liquidity tightening measures may not help, added Chokkalingam.
Shares in Indian lenders slumped on Wednesday, extending recent falls, on uncertainty about how long the central bank will maintain cash-draining measures that have raised short-term interest rates and sent bond yields surging.
Banks have been among the worst hit by the RBI measures, which raises concerns about their short-term funding costs and the values of their debt holdings. The NSE's banking index slumped 13.8 percent in July.
Yes Bank Ltd (YESB.NS: Quote, Profile, Research), which is among the banks reliant heavily on short-term funding, slumped 7.1 percent after earlier falling to its lowest since July 30, 2012. The private lender has fallen 29.7 percent this month.
ICICI Bank Ltd (ICBK.NS: Quote, Profile, Research), India's second largest lender by assets, fell 1.8 percent after its first-quarter net profit came in line with estimates but provisions for bad loans and contingencies rose 27 percent to 5.93 billion rupees.
Consumer shares continued to fall on profit-taking after hitting record highs earlier this month. Hindustan Unilever Ltd (HLL.NS: Quote, Profile, Research), which hit an all-time high on July 24, fell 2.3 percent while ITC Ltd (ITC.NS: Quote, Profile, Research) ended 2.5 percent lower.
However among stocks that rose, Bharti Airtel Ltd (BRTI.NS: Quote, Profile, Research) gained 7.3 percent after its June-quarter operating profit came in above expectations, analysts said.
State-owned oil companies gained after Tuesday's sell off sparked by concerns a weaker rupee would raise import costs, was seen as overdone. Oil and Natural Gas Corp Ltd (ONGC.NS: Quote, Profile, Research) rose 3.6 percent while Indian Oil Corp (IOC.NS: Quote, Profile, Research) ended 4.8 percent higher.
HCL Technologies Ltd (HCLT.NS: Quote, Profile, Research) gained 3.5 percent after India's No. 4 IT services exporter beat expectations with a 41.6 percent rise in April-June earnings.