Markets fall as Fed caution offsets easing inflation data

MUMBAI (Reuters) - India's stock markets faltered on Tuesday as caution ahead of the U.S. Federal Reserve interest rate decision continued to weigh on sentiment, offsetting initial slight gains from data showing consumer inflation easing to the lowest on record.

Data late on Monday showed consumer price inflation eased to 3.66 percent in August from a revised 3.69 percent a month ago, in line with forecasts.

The data raised expectations the Reserve Bank of India (RBI) would cut interest rates for a fourth time this year at its policy review on Sept. 29. But analysts warn much could depend on the Fed decision due on Thursday.

A call to raise U.S. interest rates could prevent the RBI from cutting its repo rate should global markets react violently, according to analysts.

Foreign investors have already sold a net $995.5 million of Indian shares so far this month, according to data from National Securities Depository Ltd, after selling around $2.6 billion in August - the biggest monthly sales ever.

"There is no positive trigger as of now. The only expectation is keeping the rates unchanged by the U.S. and a possible rate cut in India," Alex Mathews, head of research at Geojit BNP Paribas said.

The BSE Sensex lost 0.4 percent after earlier gaining as much as 0.2 percent.

The broader Nifty was down 0.5 percent after earlier rising as much as 0.1 percent.

Heavily owned blue chips were among the leading decliners, with Tata Motors Ltd slipping 2.9 percent and ICICI Bank Ltd losing 1.5 percent.

Meanwhile, Bharat Forge Ltd slumped 5.8 percent after Bank of America-Merrill Lynch lowered its target price on the stock to 900 rupees from 1080 rupees, citing concerns over non-auto export growth.

Bucking the trend, Maruti Suzuki Ltd's shares rose 1.1 percent after the RBI said foreign institutional investors could invest up to 40 percent of the paid up capital of the company.

(Reporting by Karen Rebelo in Mumbai; Editing by Anand Basu)