Earlier in the session, sentiment had been supported by a continued rally in lenders such as ICICI Bank due to expectations the Reserve Bank of India would cut interest rates as early as its next policy reviews in December or February.
The broader NSE index had risen as much as 0.34 percent to a record high of 8,350.60, as sentiment was upbeat after U.S. shares ended at record highs on Friday on the back of the Bank of Japan's surprise move to ramp up its stimulus programme.
Sentiment was also positive as overseas investors bought Indian shares worth $285 million on Friday, their biggest single-day buying since Sept. 5, exchange and regulatory data showed.
"We have seen a one-sided rally in the past few sessions. There could be some profit-booking. However, the undercurrent is still positive," said Suresh Parmar, head, institutional equities at KJMC Capital Markets.
The benchmark BSE index closed 0.02 percent lower at 27,860.38 points after earlier rising as much as 0.37 percent to a record high of 27,969.82 points.
The broader NSE index closed 0.02 percent higher at 8,324.15 points.
Markets will be closed on Tuesday for a public holiday.
Data showing a modest pick-up in Indian factory activity, according to the HSBC Manufacturing Purchasing Managers' Index (PMI), failed to have much of an impact
Banking stocks gained with State Bank of India closing 0.76 percent higher on hopes of rate cuts. Traders also said the lender's decision to cut some deposit rates could improve margins. ICICI Bank closed up 1.2 percent.
SBI and ICICI have gained 4.8 percent and 3.3 percent respectively in the last week.
Among state-run lenders, Punjab National Bank closed up 2 percent, while Bank of Baroda gained 2.2 percent and Canara Bank ended 1.7 percent higher.
Airlines also rose. Jet Airways ended up 3.7 percent while SpiceJet gained 6.8 percent after state-run oil marketing companies cut jet fuel prices.
However, auto stocks declined. Mahindra and Mahindra closed 2.96 percent lower, Maruti Suzuki India Ltd ended down 1.5 percent and Tata Motors fell 0.83 percent.
Among other decliners, Gail India Ltd closed down 5.6 percent despite posting a 42 percent rise in September quarter earnings as analysts say the profits were "propped up" by zero subsidy provision from the government.