Sensex falls as rally stalls; derivatives expiry eyed

People walk past the Bombay Stock Exchange (BSE) building in Mumbai May 18, 2009.

MUMBAI (Reuters) - The BSE Sensex fell on Wednesday as a recent rally continued to stall as investors booked profits in recent out-performers such as Bharti Airtel, while caution also prevailed a day before the expiry of monthly derivative contracts.

Shares also tracked weaker European and Asian markets as popular opposition within the euro zone to austerity measures unnerved investors already worried about a weak global growth outlook.

The Sensex has risen 6.9 percent this month as of Tuesday, becoming the second-best performing Asian index after Sri Lanka's Colombo Stock Exchange, largely on the back of the government's reform juggernaut and strong inflows from foreign investors.

"Markets have rallied smartly post-various policy related announcements that came last week, and with the derivative expiry on Thursday, markets are just trying to consolidate at current levels," said Kaushik Dani, a fund manager at Peerless Mutual Fund.

"No major news flow in past couple of days is helping market to have a healthy consolidation,"

The BSE index fell 0.33 percent, or 62.24 points, to 18,632.17, retreating from the 14-month highs hit on Friday.

The 50-share Nifty fell 0.18 percent, or 10.45 points, to 5,663.45 points.

September options and futures contracts are set to expire at the end of the session on Thursday. The event tends to spark volatility in markets.

Shares in Indian wireless services providers fell on continued profit-taking on expectations a run-up in share prices this month is unjustified given concerns about the sector's outlook, including stepped up competition after an upcoming spectrum auction.

Bharti Airtel shares fell 3.8 percent, after having risen 11.2 percent for the month as of Tuesday's close.

Reliance Communication declined 1.5 percent, while IDEA Cellular lost 0.6 percent.

Lanco Infratech fell 3.9 percent after rising 44.4 percent in previous seven days.

Power Finance Corp fell 4.6 percent after Barclays Capital downgraded the stock to 'underweight' from 'equalweight', expecting only a limited positive impact from the government bailout of state-owned electricity distributors.

Shares in IFCI fell 5.8 percent after markets regulator Securities and Exchange Board of India allowed the government to acquire a majority in the project finance lender without buying out minority shareholders.

Infotech Enterprises fell 1.4 percent after Morgan Stanley downgraded the engineering software services provider to 'equal-weight' from 'overweight', citing concerns about margins after a meeting with the management.

However, among gainers, ACC Ltd rose 3.8 percent after Credit Suisse upgraded the stock to 'neutral' from 'underperform', saying cement prices have declined less than expected, while cost pressures are subsiding and capacity pressures are easing.

(Additional reporting by Manoj Dharra; Editing by Rafael Nam)