Data for inflation based on wholesale price index, scheduled for release on Monday, is expected to have a major bearing on RBI policy meet on December 18. Price rise measured by the consumer price index rose to a nine-month high of 11.24 per cent in November, raising fears of an imminent rate hike.
According to ICICI Bank Treasury Research Group, November WPI print is expected at close to 7 per cent. In September, it stood at 6.46 per cent, rising for the fourth straight month.
"The odds of a rate hike by the RBI have increased substantially post the sharp uptick in the November retail inflation...if WPI inflation data also shows a material uptick then it would create an outside chance of 50 bps repo hike," said brokerage India Infoline.1 bps is equal to 0.01 per cent.
The Sensex, led by rate-sensitive sectors, slid over 600 points since hitting its all-time high on December 9 on profit-booking and fears that inflation would compel RBI to hike lending rates. It ended at 20,715.58 on last Friday.
However, some analysts feel stocks may rebound on Monday.
"Due to successive decline in the last four sessions, we may see some technical rebound on Monday especially in oversold positions," said Jayant Manglik, President-Retail Distribution, Religare Securities Limited.
Jignesh Chaudhary, Head of Research at Veracity Broking Services said that markets anticipate some hawkish stance from RBI in the form of increase in lending rates this week.
On the global front, the Federal Open Market Committee (FOMC) will hold a 2-day policy meeting on interest rates on December 17-18.
Strong US retail sales, a good jobs report for November and signs of a budget agreement in the Congress have cemented fears that the FOMC would decide to taper the USD 85 billion per month financial asset purchases quicker-than-expected.
Since May when Fed chief Ben Bernanke first hinted at 'tapering', global markets have been nervous as the US stimulus if trimmed could lead to drying of liquidity flowing into emerging markets, analysts said.
The US Senate is expected to vote next week on the new budget deal and Janet Yellen's nomination to lead the Fed after Bernanke's term ends.
Besides the major policy events, initial trends of the third instalment of corporate advance tax payments by mid next week would also provide cues to earnings, said traders.
Investors would also keep an eye on the ongoing winter session of Parliament that is underway, they added.
"Markets fell on the last trading day of the week, tracking nervousness across the globe on worries of Fed tapering in the forthcoming FOMC meeting due this week. Rate hike fears too had spooked market and currency," said Vivek Gupta, Director Research, CapitalVia Global Research.