The BSE Sensex and Nifty gained slightly to extend a winning streak to a fourth day as Cipla surged after posting a jump in earnings, but Coal India slumped after its fuel supply agreements with utilities sparked concerns about its margins.
Gains on Wednesday were limited as China's manufacturing activity fell to an eight-month low, adding to risk aversion ahead of the Federal Reserve's meeting later in the day and the European Central Bank policy meeting this week.
The tepid start to August comes after the BSE Sensex fell 1.1 percent in July on growing worries that disagreements among ruling coalition parties could hamper policy reforms at a time when a shortfall in monsoon rains threatens to aggravate India's inflation and deficit problems.
P. Chidambaram's appointment as the Finance Minister was seen as a positive given his reformist image, but investors would need to see action on fiscal measures or other measures to attract foreign investment, traders said.
Buying of foreign institutional investors in Indian stocks has been one bright spot, as they ended purchasing a net 111.52 billion rupees in July, according to provisional regulatory data, their biggest purchases since February.
"Market can surprise on the upside in near term, provided we don't get negative news from Europe and U.S. All the negatives that were built in are right now priced in," said Mehraboon Irani, principal and head of the Priority Client Group at Nirmal Bang.
"In the meanwhile, FII buying has happened, there is an expectation that some of the tax laws that have gone against the foreign institutional investors will be addressed."
The 30-share BSE Sensex rose 0.12 percent to 17,257.38 points, enough to mark its highest close since July 19.
The 50-share Nifty gained 0.22 percent to end at 5,240.50 points.
Drug maker Cipla rose 4.6 percent, having earlier hit its highest since January 2011, after posting a much better-than-expected net profit in the April-June period, with analysts expecting continued momentum in the current quarter.
Shares in diesel power generators rallied after a two-day blackout in India spurred hopes of increased sales of back-up electricity units.
Cummins India rose 2.4 percent, while Greaves Cotton gained 1.2 percent.
Multi Commodity Exchange of India Ltd rose 1.9 percent after Credit Suisse initiated coverage of the stock with an "outperform" rating, citing its dominant market share among domestic commodity exchanges, lower trading penetration in India and attractive valuations versus its regional peers.
However, Coal India fell 2.8 percent after its agreement to supply at least 80 percent of the coal needed to fuel new power projects was seen exposing the miner to risks to its margins, though senior officials denied its profitability would be hit.
Shares in the state miner will be vulnerable for more falls after U.K. fund The Children's Investment Fund Management said on Wednesday it has filed a petition in the Delhi high court against a coal ministry directive in January mandating Coal India reverse a price hike.
Maruti Suzuki fell 0.8 percent after saying July sales rose less than expected, while Mahindra & Mahindra fells 0.3 percent after its tractor sales came in short of market expectations.
IDBI Bank shares fell 1.7 percent, a day after the public sector lender posted a lower-than-expected April-June net profit on the back of a rise in non-performing assets and higher provisioning expenses.