The benchmark 30-share Bombay Stock Exchange index fell 0.93 percent to 6,607.78 points in choppy trade which saw the index briefly climb above 6,700. The market saw a broad decline, as losing issues outnumbered gainers.
"Some sort of correction was expected after the market hit a new high," said Chandan Desai, director at Taib Securities. "But this is a correction in a bull market. Sentiment is positive as a good budget is expected, foreign fund investments are pouring in, and the corporate sector is doing well."
Foreign funds, who have stepped up their purchases of Indian shares with renewed vigour after a lull in January, have so far pumped in nearly $1.2 billion in February, more than four times the total for all of January.
The index rose nearly 9.5 percent between January 12 and February 14 in the wake of robust quarterly earnings season and on hopes of an investor-friendly budget on February 28.
India's communist-backed coalition is expected simplify and widen the tax regime and allow more foreign investment in key sectors like banking.
Shares in consumer goods giant Hindustan Lever Ltd dropped 5.4 percent on worries that the Indian unit of Unilever was vulnerable because of a string of poor quarterly results.
Maruti Udyog Ltd fell 3.9 percent after parent Suzuki Motor Corp denied reports it would make an open offer for shares in the India's largest car maker.
Federal bonds slipped as investors lightened their debt holdings to make room for fresh supplies of 12-year loans to be sold next week on behalf of 16 state governments.
The yield on the 10-year benchmark bond closed nearly 2 basis points higher on the day at 6.5302 percent.