US lawmakers have so far remained deadlocked during their discussions on next year's budget. Over $600 billion in tax increases and spending cuts are scheduled to start taking effect in January 2013 unless US Congress acts to avert them.
"Markets are hoping for a solution to the US budget issue because if a solution is not reached, it can impact sentiments negatively. We expect the issue to be resolved and the same can provide relief in short term," Dipen Shah, Head of Private Client Group Research, Kotak Securities said.
While Indian markets will closely track Asian markets after it resumes on Monday, trends from the US on Friday were poor with Dow Jones Industrial Average sliding 121 points.
Indian stock markets will also see a truncated trading this week as Tuesday is a holiday on account of Christmas. Analysts said the truncated week will witness volatility in the markets as traders generally prefer to roll over positions ahead of expiry of derivative contracts.
"Generally, it is observed that during the last week of December month, volume activity is very low and hence, market's trading range becomes narrower towards the year end.
"However, any adverse development in the US, with regards to US budget issue may result in enhanced volatility in the market," Angel Broking said in a report.
Besides, traders said the next big trigger for domestic equity market is the third quarter results when India Inc starts unveiling earnings report card from mid-January.
Last week, the BSE benchmark Sensex failed to hold on to mid-week gains and ended lower by 75 points at 19,242 due to tail-end selling triggered by worries over US budget issue.
Experts said a steep fall in overseas markets on worries over US budget deficit had pulled down Indian shares.