Sensex, Nifty trade lower ahead of RBI policy meet; auto stocks drag

Indian shares retreated on Tuesday from four-month highs hit in the previous session as investors stayed on the sidelines ahead of the Reserve Bank of India's policy meeting.

Analysts expect the RBI to cut the repo rate by 25 basis points on Wednesday after December inflation hit a two-year low. But they warn it will be a close call since the central bank may even opt to maintain status quo until its next review in April.

RBI may keep rates unchanged as it continues to assess the impact of the crackdown on high-value notes on inflation, some analysts said.

Most Indian automakers were down, contributing to over three-fourths of Nifty's decline, with Tata Motors Ltd and Mahindra & Mahindra Ltd falling as much as 2.4 percent and 1.7 percent respectively.

Banks have already slashed lending rates this year after deposits surged following the ban on high-denomination currency notes, reducing the need for further rate cuts.

"I don't think that the RBI will cut interest rates this time," says Sangeeth V, an institutional sales trader with Paterson Securities.

"Banks are already flush with funds post-demonetization."

The broader Nifty was down 0.28 percent at 8,777.30 as of 0604 GMT while the benchmark 30-stock Sensex was trading 0.24 percent lower at 28,371.40.

On Monday, both the indexes hit their highest since late September.

Among the gainers, ITC Ltd rose to a record high. Government-owned Specified Undertaking Of The Unit Trust Of India sold a two-percent stake in the country's biggest cigarette maker via block deals.

Railway coach maker Titagarh Wagons Ltd rose as much as 7 percent after getting a contract worth one billion rupees from the Ministry of Earth Sciences. ($14.84 million)