The BSE benchmark index Sensex has rallied over 11 per cent this month so far on the back of hectic buying from foreign institutional investors.
According to analysts, investors generally want to lock in gains after such large swings.
"Rise in key indices for the entire month has been sharp without any meaningful profit-booking. This makes stock markets even more vulnerable to profit-booking. Any recovery in dollar rates against rupees can also lead to profit-booking.
So, at this level, caution is advised because a correction from the current level could take Nifty to 4,980 levels on the downside," Milan Bavishi, Research Head, Inventure Growth and Securities, said.
After months of low participation on Indian bourses, foreign funds are making their presence felt again.
"Markets may correct by 5-7 per cent this week as the recovery in the past few sessions was very sharp and valuations are now really expensive," CNI Research CMD Kishore P Ostwal said.
Marketmen also noted that the market is getting into a phase where it is in an overbought position and any bad news could possibly lead to a reversal in the rally.
Given the 11 per cent rally, there may be profit booking in the short-term. But, we are bullish in the medium to long-term, an expert said.
Analysts also said that 2012 may see some volatility in the first half on account of unfolding of Europe\'s debt issues and domestic issues on fiscal deficit and inflation.
Markets will also keenly watch movements in Greece. Hopes of some headway in the Greece debt negotiations had strengthened the sentiments in the markets last Friday.