Mixed global cues before the US Federal Reserve starts its two-day meeting, also affected domestic sentiments.
After a better start at 20,732.44, the BSE Sensex inched up to 20,784.03 on value-buying and positive cues from Asia.
However, it struggled at the day's peak and wiped off all gains to enter the negative terrain in the second half.
The 30-share BSE Sensex closed down 47.38 points, or 0.23 per cent, at 20,612.14 as 14 stocks declined while 16 rose.
Rate-sensitive banking, realty and auto shares were worst hit while defensive bets like healthcare and FMCG scrips saw buying. HDFC Bank, HDFC Ltd, NTPC and Coal India saw sharp losses while Bharti Airtel, Sun Pharmaceuticals Industries, Cipla Ltd and ITC Ltd rose.
The BSE Sensex has now lost over 714 points in six sessions.
The 50-share NSE Nifty index fell by 15.65 points, or 0.25 per cent, to 6,139.05, after touching the day's high of 6,190.55. SX40 index of MCX-SX fell 20.64 points to 12,264.64.
"Higher than expected inflation has fuelled expectations that RBI may hike rates in its meeting tomorrow. Similarly, outcome of Fed's meeting will have impact on Indian equity markets on Thursday," said Milan Bavishi, Head Research, Inventure Growth and Securities.
Expectations of a 0.50 per cent hike by RBI tomorrow have also built up after wholesale price index based inflation data came out higher-than-expected and price rise in retail level soared to over 11 per cent, said analysts.
The initial gains on BSE Sensex today were also lost on weak opening in European stock markets, they added.
The BSE Banking sector index suffered the most by losing 1.28 per cent, followed by PSU thematic index (0.83 per cent), Power index (0.73 per cent) and Realty index (0.66 per cent).
Oil & gas index was also a loser dragged down by RIL.
Bucking the weak trend, the stocks of consumer durable, healthcare, FMCG, Teck, IT and capital goods sector gained and saved the market from any major fall, said dealers.
BSE Sensex falls for sixth day on caution ahead of RBI policy review, HDFC Bank share price hit
(Reuters) BSE Sensex fell for a sixth consecutive session on Tuesday as rate sensitive shares such as HDFC Bank continued to tumble a day before the Reserve Bank of India (RBI) is widely expected to raise interest rates at its policy review.