Stocks recovered to close in the positive zone on Tuesday.
Both the Sensex and the Nifty had fallen as much as 0.5 per cent as investors booked profits in banking shares such as State Bank of India amid cautious trading ahead of major central bank meetings.
The Sensex ended 12.75 points or 0.05 per cent higher at 24,659.23 while the NSE Nifty was down 0.05 points at 7,485.30.
The BSE and NSE both surged about 7 per cent in the last four days through Friday. Indian markets were closed on Monday.
Asian stock markets also wobbled, after they hit a two-month high in the previous session, ahead of the European Central Bank's policy review on Thursday and US Federal Reserve's policy meeting next week.
"It's a retracement that we are seeing after last week's rally," said AK Prabhakar, head of research at IDBI Capital.
"Now the fresh selloff has started and its mainly because of the global factors."
Global factors will likely continue to influence domestic markets in the days ahead.
But investors remain hopeful the Reserve Bank of India could cut interest rates even before its next policy review on April 3 after the government last week stuck to its fiscal deficit target for next year.
State-run lenders such as State Bank of India and Punjab National Bank fell 2 per cent after a rally last week that was spurred by the Reserve Bank of India's move to ease capital requirement rules.
SBI lost 2.18 per cent to finish at Rs 183.10 while PNB declined 1.81 per cent or Rs 1.50 at Rs 81.50.
Just Dial slumped 15.26 per cent as investors booked profits following a near 42 per cent surge in the past four sessions. Goldman Sachs downgraded the company to "sell", partly on fears about the company's core search business.
Among the gainers, miners NMDC and Steel Authority of India jumped 6.2 per cent and 8.3 per cent, respectively, on strong metals trade data from China, the world's top metal consumer.