Why is the mood swinging so much on markets? Here's a look at the factors driving volatility

Sensex, Nifty

Indian markets swung between gains and losses on Monday ahead of the key Reserve Bank of India's bi-monthly policy and US inflation data due later this week. In the morning trade today both benchmark Sensex and Nifty fell around 1% before rebounding and turning positive. Now again, both indices have declined around 0.4%.

Indian markets extended their losses for the third session and lost around 3% in this period. Expectations of liquidity tightening by global central banks are worrying investors. Many analysts expect RBI to hike rates. Also selling by foreign and domestic investors added volatility in the markets.

Here are the reasons markets are falling over the last few sessions:

Hawkish central banks: The US Job report on Friday showed a whopping 709,000 more jobs were added in November and December than previously estimated. The Fed is preparing to raise interest rates in March and this job report spurred speculation that the central bank may need to move aggressively, analysts say.

The Bank of England just delivered back to back hikes and some of its officials wanted to act even more forcefully. The Bank of Canada is set for lift-off next month. Even the European Central Bank may get in on the action later this year. All eyes are now on US Inflation data on Thursday.

RBI policy meet: The RBI bi-monthly policy meeting started today and will announce its decision on 10 February. Analysts expect that the RBI will raise the reverse repo rate on Thursday, announcing the start of policy normalisation and joining other central banks withdrawing emergency support. Many analysts expect RBI to raise the reverse repo rate by 20-25 basis points to 3.55-3.6% at its next meeting. A few economists expect RBI to keep rates unchanged. Economists don't expect any change in the repo rate till April.

Crude oil: It hit around seven year high to trade above $90 a barrel on ongoing worries about supply disruptions fuelled by frigid US weather and ongoing political turmoil among major world producers, according to a Reuters report. Crude rallied 20% this year and is likely to surpass $100 a barrel, analysts expect. Surging crude oil prices are negative for the Indian economy as they further harm fragile consumer demand currently visible and pressure the Reserve Bank of India to tighten monetary policy at a faster rate to contain inflation.

FII, DII selling: Foreign investors' continued selling also dampened sentiment. FIIs sold $4.45 billion in January and $1.17 billion in February. Between October and December, FIIs sold $5.12 billion in equities. In the last two of three sessions domestic institutional investors have also seen selling pressure. They sold around Rs 1,000 crore in equities.

December quarter earnings: The Q3 results saw a mixed trend. Brokerage firm Jefferies India downgraded fiscal year 2022 earnings for 55% of the firms it covers which have reported results so far. Margin pressures have partly been tided over by double-digit price hikes across several consumer products. This has resulted in significant volume impact with staples majors HUL and Marico reporting 2/0% volume growth. Building material firms Supreme and Finolex saw 15-18% volume declines. Durables major Havells also saw volumes slacken post festive season. Cement, steel and generic pharma have continued to bear the brunt of rising input costs that eroded margins, Jefferies said.

(Inputs from Reuters and Bloomberg)