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A fall in blue-chips such as Larsen and Toubro on anxiety ahead of the quarterly earnings season and inflation data hurt local shares.
India's inflation rate will probably ease in December from stubbornly high levels, helped by waning food prices, a Reuters poll showed, providing some respite to the Reserve Bank of India which has been struggling with cost pressures and slow growth.
"Custodian banks were among the major sellers today. Range-bound trading is expected to continue in the near-term," said Vikas Babu Chittiprolu, a senior foreign exchange dealer at state-run Andhra Bank.
Foreign funds, which turned net buyers of over $850 million worth of bonds in December after a six month hiatus, have so far in 2014 purchased a net $215.50 million. Debt related inflows were also seen on Thursday, dealers said.
Government bonds rose as investors were assuaged by comments from a Reserve Bank of India deputy governor that a proposed debt switch may happen only in the next fiscal year starting April.
In equities, foreign buying has waned with investors having bought only a net $60.70 million so far this month, after purchasing over $20 billion in 2013.
The partially convertible rupee closed at 62.07/08 per dollar, unchanged from its previous close. It rose to 61.9650 during the session, its strongest since January 2.
The Indonesian rupiah led gains among emerging Asian currencies on Thursday as investors covered short positions in regional units, while South Korea's won rose after the central bank left rates steady.
In the offshore non-deliverable forwards, the one-month contract was at 62.42 while the three-month was at 63.27.
