Rising bond yields in Japan pull money back into its home market, reducing global liquidity and potentially triggering outflows, higher yields, and rupee swings in India. India stays stable mainly because domestic investors buy most of its bonds, but this support may weaken if inflation or government borrowing rises. Recent pauses in foreign flows reflect global worries, not India’s fundamentals. If the RBI cuts rates, investors must watch inflation, liquidity changes and unpredictable foreign flows.

Q.⁠ ⁠Japan’s bond yields have moved after decades of near-zero levels. How exactly do rising Japanese yields alter global capital flows, and which channels tend to transmit this pressure most quickly to emerging markets like India?

Rising Japanese Government Bond (JGB) yields reshape global capital flows because Japanese institutional investors - who are among the world’s largest foreign bondholders - tend to pull money back home when domestic returns improve. This tightens liquidity at a global level and puts pressure on emerging markets through three channels: Portfolio outflows, a sharper unwind of the yen carry trade, and a rise in global risk-free rates. "For India, the spillover is felt through weaker FPI debt flows, higher local yields, and short-term rupee volatility, though strong domestic ownership of Government Securities helps cushion the impact," said Tushar Sharma, co-founder of Bondbay.

Q.⁠ ⁠Despite Japan’s ripple effect on other markets, India’s bond yields remained steady due to domestic demand. Is this resilience structural, or are there conditions under which domestic investors may no longer be able to cushion global shocks?

India’s steady bond yields despite the global volatility largely reflect structural strengths: a market dominated by domestic investors such as banks, insurers and provident funds, predictable government borrowing, and an RBI stance that smoothens liquidity, says Sharma. "But this cushion is not unconditional. If fiscal deficits widen sharply, inflation stays elevated, or the government gets into heavy borrowing, domestic buyers may demand higher yields."

Similarly, if banks shift toward credit growth or insurers rotate into equities, the absorption capacity that protects India from global shocks could weaken, making yields more sensitive to external pressure.

Q.⁠ ⁠Foreign flows into the FAR segment have softened this month. To what extent is this pause driven by Japan’s higher yields versus global risk sentiment more broadly, and how should India interpret this shift?

The pause in FAR flows likely reflects a mix of factors - rising yields in Japan making global fixed income more competitive and broader risk-off sentiment as global bond markets wobble. Higher Japanese yields tend to pull capital back towards safer home markets and reduce appetite for external-market debt, while risk-aversion drives investors away from emerging-market assets overall.

"For India, the decline in foreign participation via FAR signals that external conditions, rather than domestic fundamentals, have become dominant in investor decisions. The key takeaway is that the domestic policy strength and local liquidity cushion remain crucial, but India cannot rely solely on external flows for yield stability," said Sharma.

Q.⁠ ⁠With expectations building around a possible 25-bps rate cut in the upcoming policy, what are the key indicators the MPC will be weighing most heavily, and how soon could a shift in policy stance feed into the longer end of the yield curve?

The MPC’s rate-cut decision will hinge primarily on the trajectory of core inflation, the durability of food-price moderation, and whether growth remains comfortably above trend. It will also weigh liquidity conditions, the fiscal glide path, and external risks such as crude prices and global financial tightening. If a 25-bps cut is delivered with a shift toward a more accommodative stance, the impact on the long end could appear fairly quickly: 5–10 year yields typically adjust ahead of policy, reflecting expectations of easier liquidity and lower future borrowing costs, though the magnitude will depend on government supply and global risk sentiment.

Q.⁠ ⁠If the RBI begins a fresh rate-cut cycle, what risks should investors watch for, for-particularly regarding inflation, liquidity management, and the possibility of volatile foreign flows once developed-market yields adjust again?

If the RBI starts a new rate-cut cycle, investors should watch three key risks. First, inflation volatility: food prices remain sensitive to weather shocks, and an early or aggressive easing cycle could revive demand-side pressures. Second, liquidity swings: rate cuts usually widen system liquidity, but the RBI may still sterilise excess flows to prevent speculative activity, creating uneven money-market conditions. Third, foreign-flow instability: once U.S. and Japanese yields adjust, global funds may rebalance portfolios, triggering abrupt inflows or outflows into EM. Sharma says, "For bond investors, the combination of softer policy and shifting global yields can amplify curve volatility, especially in the 3–7 year segment."