Markets were concerned about the fact that with the inflation in US at its highest in nine years the US Federal Reserve, which is meeting tomorrow to review interest rates, would probably increase the rates by around 50 basis points. According to market observers, this should see money flowing into the bond markets with higher yields, moving away from the equity markets.

On the other hand, according to market observers, political developments on the Indian soil on the issue of suitability of Sonia Gandhi for prime ministership questioned by three senior congress partymembers Sharad Pawar, P A Sangma and Tariq Anwar was discounted by the markets completely as the markets, were and are, being driven by the FIIs.

"The political factor should now actually play a positive role with the crack in the Congress party the BJP could emerge as the single largest party in the country", said S Sankaranarayanan, fund manager, Tata Mutual Fund.The bench-mark BSE Sensitive index resumed on a firm note at 4,091.19 and rallied further to post a new high at 4,113.42 but selling in the form of profit-booking pushed the index below 3900-mark level to a low at 3,888.81.

In the last half hour fresh buying from FIIs and entry of operators lifted the Sensex to close above 4,000-mark at 4,039.59, still showing a net loss of 36.08 as against last Friday's close of 4,075.47. The S&P CNX nifty also corrected and closed at 1,151.90 registering a loss of 13.45 points. The market corrected itself reacting to a fresh political developments over the weekend. At the same time, globally there has beensome amount of selling pressure in anticipation of US federal Reserve hiking the interest rates by a quarter percent.

Markets reacted with caution to the fresh political developments as brokers felt that field was wide open for a coalition government again at the centre. There is likelihood of a fragmentation of the parties. Market observers say that it will be the third front who will benefit the most from the unrest within Congress. "Stock markets did not like the fact of emergence of the third front and hence a reaction to the political developments has been cautious".

Dilip Bhat, a BSE broker attributed the loss in the markets to the likelihood of a hike in the US interest rates which also saw the SE Asian markets close weak. According to Bharat Shah, chief dealer at Dalal and Broacha, the market is volatile and the buying should be avoided in the current market scenario. Investors should book profits at all possible levels. Arun Singh, analyst, at Dalal & Broacha said that if FIIs started selling atthe current level then no one will find an exit route, so it is a precarious situation. "With the Indian market now totally dependent on FIIs the direction to the market will also come from the FIIs", he added.

According to Malay Sameer Fund Manager at Apple Mutual Fund:"The market is in an overbought zone as reflected by the Relative Strength Index but the liquidity flow were so strong that it was not allowing the market to correct itself downwards. Today foreign buying was restricted to a few stocks and the slowdown in the liquidity flow resulted in the index coming down. This is a healthy sign".

FIIs, who had made net purchases of Rs 296 crore on Friday, for the first time since May 3 were conspicuous by their absence while making small purchases at certain specific counters. Reliance Industries, HLL and ITC were the major contributors to the decline of the index. Reliance fell from a high of Rs 184.90 to Rs 170.65, before recovering to Rs , HLL declined from Rs 2280 to Rs 2230, ITC declined from Rs1142 to Rs 1076.

The commodity and cyclical stocks after a long time showed some slowdown as FIIs booked profits at higher levels. Grasim at Rs 176.60, Indian Rayon at Rs 105 hit the lower limits of the circuit on BSE. Larsen and Toubro, MTNL, BSES, Tata engineering, Hindalco, Indian Aluminium, Finolex cables, Sterlite Industries were weak on profit booking.