Concerns that China's potentially higher weightage in MSCI's global equity benchmarks will result in lowered weightings for other emerging markets including India also weighed on local sentiment. Global index provider MSCI said it will consider raising the weightage of China's large A-share stocks to 20% from 5%. The inclusion may reduce India's weightage to 8.8% by August 2019 from 9.3% currently.
The BSE Sensex declined 0.3% to 36,542.27 and the Nifty 50 Index fell 0.2% to 11,041.45. Yes Bank rose 1.7%, recovering from a near two-year low, after the lender's board formed a panel to search for a new chief executive. The bank's board has requested the Reserve Bank of India to grant an extension for the current CEO's term in office. Morgan Stanley said the extension, if approved, would be helpful to the bank. Software exporters Infosys and Tata Consultancy Services were also among top losers, dropping by at least 1.2%.
Axis Bank and HDFC Bank were other major lenders to rise on Wednesday, adding up to 0.8%. ICICI Bank edged higher by 0.8%.
Goldman Sachs said a recent selloff in financials was overdone, and profitability is on the mend amid a structural improvement in fundamentals after a long and painful cycle. Citibank said ICICI Bank, down 10% this month, offered a "decent" risk reward profile, pointing to the lender's improving business trajectory.
ITC and Hindustan Unilever were among the major losers on the Sensex, falling 2.7% to 293 rupees and 1.4% to 1610.70 rupees, respectively. While there was no trigger for the decline on Wednesday, shares of consumer companies have come under pressure in recent weeks amid concerns over valuations. Shares of ITC are down 8.2% this month, headed for their worst decline in a year and HUL is down 9.5%, headed for biggest decline in almost eight years.
Tata Motors fell 3.2% to 233.30 rupees. Morgan Stanley recommended avoiding Indian carmakers with a global exposure following a move by Germany's BMW to lower guidance for financial year 2018.
Non-banking financial companies, which have been under the spotlight recently amid worries over liquidity and funding, were mixed on Wednesday. Dewan Housing Finance, down over 50% in the previous three sessions, added 1.4%. Indiabulls Housing Finance climbed 6.9%, while Cholamandalam Investment and Finance slipped 1.4%.
Data released late Tuesday showed India's fiscal deficit for the April-August period stood at 94.7% of the estimate for this financial year. The deficit was 96.1% of the budget aim in the same period last year.
India approved a financial package of 55.38 billion rupees ($762 million) for the cash-starved sugar sector on Wednesday. However, sugar stocks edged lower, Shree Renuka Sugars fell 4.9%, Dhampur Sugar lost 9.4% and Bajaj Hindustan declined 8.8%.
Telecommunication stocks advanced after India's cabinet on Wednesday approved the new National Digital Communications Policy that aims to enhance the digital infrastructure, with a roadmap to attract investments worth 6.5 trillion rupees. Sensex's Telecom index edged 0.1% higher, driven by a 2.4% gain in Vodafone Idea.
Meanwhile, other Asian markets ended mostly higher, led by Hong Kong's Hang Seng Index, which rose 1.2%, paced by energy companies after Brent crude climbed to fresh four-year highs on Tuesday.
Investors also focused on the U.S. Federal Reserve's policy review that concludes later Wednesday. With a third interest rate increase by the bank this year largely priced in by investors, attention is on the monetary authority's outlook for future rate increases amid escalating China and U.S. trade tensions.