The 30-share BSE index ended down 0.42 percent, or 71.11 points at 17,059.4 points, with 21 components declining, after rising as much as 0.45 percent earlier.
"The stocks stayed in the negative zone as the inflation number was higher than expected. I think the higher inflation is not going to go in a hurry," said Neeraj Dewan, director at Quantum Securities.
India's food inflation accelerated to 9.9 percent in end-July, the highest since mid-March.
However, analysts expect some bargain hunting to come in to the market after the main stock index ended lower for seven out of the last eight sessions. It had fallen 8 percent in the six sessions till Tuesday.
"We see value buying coming in the sectors linked to domestic consumption story such as FMCG," said Ambareesh Baliga, Chief Operating Officer at Way2Wealth.
Citi cut its year-end target for India's benchmark index by nearly 10 percent to 19,700 points, citing a weak market environment, heightened uncertainty and lower earnings.
"A number of sectors and stocks are now cheaper than they have ever been, and to that extent, there is now more value than has been the case since the post 2008-09 collapse," Citi said in its report.
Foreign institutional investors have sold Indian equities worth about $1.24 billion so far this month, after investing a net $2.3 billion until July end.
Auto maker Tata Motors ended 0.6 percent higher at 849 rupees. It reported flat profit in the first quarter shortly before the close of market. The earnings lagged estimates as higher costs weighed on margins and rising interest rates hurt sales.
Tata Communications shares closed 7.4 percent higher at 216.50 rupees, after India's telecom commission recommended spinning off surplus land held by the firm into a special purpose vehicle, paving way for the sale of the land.
Shares in India's largest mortgage lender HDFC continued to rise for the second day after RBS on Wednesday upgraded it to "buy" from "hold," citing consistent profitability and growth across economic cycles.
The stock closed up 2.6 percent at 683.70 rupees on Thursday.
The 50-share NSE index ended 0.44 percent lower at 5,138 points.
At 1108 GMT European stocks were up 0.15 percent as higher U.S. stock futures calmed frayed investor nerves after a steep selloff. The MSCI world equity index was down 0.07 percent.
The MSCI's measure of Asian markets other than Japan ended down 0.22 percent, while Japan's Nikkei closed 0.63 percent.
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