The Sensex and the Nifty fell on Tuesday to snap a three-day winning streak as stocks of blue chips such as Larsen and Toubro fell due to profit-taking after upbeat US economic data raised fears the Federal Reserve would reduce its monetary stimulus.
Even a sharp improvement in the current account deficit in the July-September quarter and the finance minister's comment that recovery was underway failed to sustain the momentum that had sent shares to near a month-high on Monday.
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Traders say caution is likely to prevail ahead of the state election results to be announced on Sunday and US monthly employment data, due out on Friday, which could help provide additional clues about potential Fed tapering.
"Taper is at least two months away and the election outcome is coming in a few days. I think election results would decide the fate of year-end money, waiting to be deployed," said Deven Choksey, managing director at K R Choksey Securities.
The BSE Sensex fell 0.21 per cent, or 43 points, to end at 20,855, retracing from nearly a month-high level hit on Monday.
The broader Nifty lost 0.26 per cent, or 16 points, to end at 6,202.
The falls also tracked Asian shares lower after the Institute for Supply Management said its index of US factory activity rose in November to its best showing since April 2011, while the pace of hiring in the sector also accelerated. In addition, construction spending increased 0.8 per cent in October, the highest since May 2009.
Among domestic blue-chip shares, Larsen and Toubro fell 1.4 per cent while HDFC Bank ended 0.8 per cent lower.
Lenders Kotak Mahindra Bank fell 1.5 per cent while ICICI Bank ended 0.3 per cent lower.
The lenders were also weighed down by the Indian central bank's plans to introduce increased capital requirements by 2016 for banks regarded as too big to fail, and make them subject to greater regulatory oversight.
Bajaj Auto dropped 0.4 per cent after the company said its November automobile sales fell 17 per cent to 310,591 units.
Rival Eicher Motors ended 2.8 per cent higher after earlier marking an all-time high of Rs 5,340, on speculation of increased buying from investors abroad, dealers said.