The Sensex and the Nifty edged lower on Monday, retreating from over two-month highs hit in the previous session, as investors booked profits even as Asian equities gained after China cut interest rates for a sixth time in less than a year.

Disappointment over earnings also hit some shares such as Asian Paints Ltd and Bharti Airtel Ltd.

Caution prevailed ahead of a key two-day US Federal Reserve Meeting, which is scheduled to start from tomorrow and domestic expiry derivative series for the month of October on Thursday.

The 30-share index ended lower by 108.85 points or 0.4 per cent at 27,361.96. Similarly, the 50-share NSE index Nifty ended down by 34.9 points or 0.42 per cent at 8,260.55.

Among BSE sectoral indices, PSU index was down 0.99 per cent, followed by oil & gas 0.95 per cent, consumer durables 0.87 per cent and metal 0.7 per cent. On the other hand, power index was up 0.46 per cent, followed by capital goods 0.38 per cent, IT 0.24 per cent and auto 0.14 per cent.

Top five Sensex gainers were BHEL (+3.72%), VEDL (+2.4%), Bajaj Auto (+2.14%), Tata Steel (+1.38%) and Hero MotoCorp (+0.97%), while the major losers were Coal India (-2.4%), HDFC (-2.09%), Bharti Airtel (-1.91%), Reliance (-1.34%) and Lupin (-1.25%).

China's monetary policy easing took place on Friday after the close of markets in India. Regional shares rose on hopes the action would help jump start growth in the world's second-largest economy.

But traders saw Indian markets as overbought after indexes have gained for four consecutive weeks, hitting their highest intraday levels since August 20 on Friday.

Markets were also briefly jolted after NSE index futures jumped as much as 5.1 per cent to 8,723.85 points in what traders speculated may have been an errant trade.

"Nothing has changed as far as the market outlook is concerned. It is slightly overbought, so obviously some corrections have happened," Deven Choksey, managing director at KR Choksey Securities said.

Meanwhile, a provisional data showed that foreign portfolio investors bought shares worth Rs 229.18 crore on Friday.

European shares fell in early trading on Monday as euphoria about the prospect of further central bank policy easing faded, with investors warning against over-confidence ahead of another week of interest rate decisions.

Comments on Monday from a key economic adviser to Prime Minister Shinzo Abe, who said the Bank of Japan did not need to boost its monetary stimulus as early as this week, have tempered expectations that Friday's policy review will see new action.

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