India's federal budget for the fiscal year beginning April 1, to be presented to parliament on February 28, is tipped to lower corporate taxes and push reforms such as privatisation and raise the limit on foreign investments in sectors like banks.
The benchmark Bombay index slid 0.75 percent to 6,534.68 points, but is up 7 percent in the past five weeks as foreign funds stepped up investments on expectations of a reformist budget that will bolster growth.
"It is very difficult to call, but there is no great downside from here and the undertone is still robust," Sameer said.
Surging foreign inflows had lifted the index to a record high of 6,719.20 on February 14.
Data released on Monday evening showed foreign funds moved more than $1.4 billion into Indian stocks in February, almost 5 times January's total of $281.1 million.
Shares of paper companies bucked the trend on news of rising product prices. Ballarpur Industries Ltd, India's biggest paper producer, rose 1.7 percent to 101.90 rupees, while Orient Paper added 3.9 percent to 142.45 rupees.
The rupee ended little changed at 43.8150/8300 per dollar as the central bank stepped in again to limit gains, with analysts saying the local unit was overvalued by about 3 percent on a trade-weighted.
It had ended Friday at a six-week closing low of 43.83/85.
Federal bonds were mildly firmer as most investors sat on the sidelines ahead of the budget, which would unveil the borrowing programme for next year.
A state loan sale that starts on Tuesday also weighed. The 7.17 percent 12-year loans aim to raise up to 63 billion rupees for 16 state governments.
The yield on the 10-year benchmark bond was at 6.5042 percent in late trade, off Saturday's 6.5131 percent.