The positive investor sentiment seen in the domestic stock markets last week has faded in the current week, with the benchmark indices ending nearly 2% lower on account of continued selling by foreign investors.

While growing fears over the interest rate hike in the US this month is the key factor for the sell-off, floods in Chennai also impacted the market a little. Markets remained flat in the first two session of the week, as the economic data and the Reserve Bank of India (RBI) decision were in line with the market expectations.

India's gross domestic product (GDP) growth for the second quarter this fiscal came in line with the street expectations at 7.4%, and RBI governor Raghuram Rajan maintained a status quo on key policy rates ahead of the US Federal Reserve's two-day meeting on 15-16 December.

But, as the week progressed, concerns over the US central bank's policy-tightening at this month's meeting intensified, dragging the markets sharply down. Further, the stock indices remained under selling pressure due to weakness in global markets on the back of less-than-expected monetary easing by the European Central Bank (ECB).

"As the week progressed, benchmark indices recorded biggest single-day percentage drop on Wednesday for first time since November 18, 2015, after Fed Chair Janet Yellen signalled at moving ahead with an interest rate hike in its last monetary policy for the year. Even the Indian rupee remained under pressure and further weakened towards 67 per US dollar," said Amar Ambani, Head of Research, IIFL.

Besides, as the India's fifth-largest city Chennai is hit by one of worst floods in the past several decades, the stocks of the companies having operations in the city came under selling pressure. Auto and IT companies had to suspend operations at their facilities in Chennai.

Weighed down by these factors, the BSE S&P Sensex index lost 490 points to end the week at 25,638 points, while the 50-share Nifty ended 160 lower at 7,781 points.

"Nifty failed to capitalise on the range breakout of last Friday as inability to cross the hurdle of 50-DMA brought the index below 7,800. It has closed below its 100-WMA. Since August 2013, index has failed to sustain below the same which has resulted into a strong pullback. However, If it violates the support of its 100-WMA and also confirms a close below the neckline of a bearish head & shoulder pattern below 7,730, selling pressure could intensify," said Ambani.