State Bank of India , the country's largest lender, rose as much as 1 percent in early trade ahead of its earnings, but reversed direction and was trading down 1 percent.
Moody's Investor Service on Wednesday downgraded its outlook for India's banking system to "negative" from "stable", as it warned of slowing growth at home and overseas hitting asset quality, capitalization and profitability.
The banking index fell 0.7 percent after the announcement. Shares in ICICI Bank , HDFC Bank and Axis Bank were down 0.4-0.8 percent.
By 11:22 a.m. (0552 GMT), the main 30-share BSE index was trading up 0.24 percent at 17,612.12 points. The index had turned negative after initially rising 0.4 percent. Fourteen of its components declined.
Export-driven Tata Consultancy Services was up 1.7 percent and consumer goods leader Hindustan Unilever rose 2.5 percent.
However, lingering concerns over the health of the domestic economy, including a widening fiscal deficit and slowing exports weighed on investor sentiment, traders said.
"You have a fiscal deficit which has ballooned, the government is scrambling to raise funds, and even export numbers are poor," Arun Kejriwal, strategist at research firm KRIS, said.
"I do not think we are insulated (from the global slowdown) anymore," he said, adding the Moody's move was expected.
Indian Prime Minister Manmohan Singh met with lawmakers of his biggest ally in the federal coalition government on Tuesday to heal a rift last week over a fuel price hike, which is seen as crucial to shrink a widening budget deficit.
Most observers expected the allies to broker a compromise that could carry a hefty price tag for an already burdened exchequer. .
Kejriwal said State Bank of India's earnings to be announced later in the day would set the direction for the market.
A Reuters poll of brokerages done nearly a month ago forecast the bank to report a 2.9 percent drop in September quarter net profit, but there has been market talk its provisioning may not be large as feared.
State-run fuel retailer Indian Oil Corp fell more than 2 percent ahead of its quarterly earnings.
India's trade deficit in October is seen at $19.6 billion, the highest in four years, the country's trade secretary said on Tuesday. At this rate, the trade deficit for the year could breach $150 billion. .
The main stock index is down 14.3 percent in the year to date, and the outlook remains hazy. In October, it had risen 7.6 percent thanks to foreign fund inflows of about $445.01 million.
The 50-share NSE index was trading up 0.15 percent at 5,297.45 points. In the broader market, there were 1.03 gainers for every loser on total volume of about 189.2 million shares.
Globally, investor sentiment was boosted after Italian Prime Minister Silvio Berlusconi said he would resign, raising hopes the debt-ridden country would proceed with reforms that may help keep the euro zone's sovereign debt crisis from spreading.
The MSCI's broadest index of Asia-Pacific shares outside Japan was up 0.9 percent, while Japan's Nikkei was 1.2 percent higher.
STOCKS ON THE MOVE
Aurobindo Pharma fell more than 4 percent in early trade after the company on Tuesday reported a net loss of 801.6 million rupees for July-September, versus a profit of 1.98 billion rupees a year ago.
Kingfisher Airlines fell 2.9 percent after the carrier late said late on Tuesday it had cut frequency on some of its flights where demand has been slow.