Last week, the Reserve Bank of India (RBI) hiked its key short-term lending and borrowing rates by 25 basis points each with immediate effect to tackle high inflation.
This led to the Bombay Stock Exchange benchmark Sensex plummeting by over 611 points or 3.21 percent last week.
The key index has witnessed a sharp plunge of 10.3 percent in January, but market observers feel it may regain some of the lost ground in the coming sessions.
"The stock markets have lost a considerable upside, which suggests that it may bottom out in the coming week and may bounce back on buying at attractive valuations, as the country's long-term growth story is intact," Globe Capital PMS Head K K Mittal said.
Besides, the knee-jerk reaction of the interest rate hike by the apex bank has already happened and the corporate earnings are also more-or-less in line with the street hopes, Mittal added.
Analysts also feel that the state-run Oil & Natural Gas Corporation reported better-then-expected third quarter numbers after the market hours on Friday, which should provide some strength to the tumbling market next week.
The company had posted an over two-fold jump in its net profit at Rs 7,083 crore for the quarter ended December 31, 2010.
But the market experts also cautioned that the persistent Foreign Institutional Investors (FIIs) outflows and no material sign of moderation in inflation may continue to haunt the street in the short-term.
"The latest intermediate downtrend was triggered by the RBI's move to hike rates by 25 basis points. This month's FIIs outflows haven't helped matters either... Concerns over political stalemate, tepid foreign direct investment (FDI) and deteriorating external balance have also added to the worries," IIFL Head of Research Amar Ambani said.