A surge in global bond yields, led by Japan’s 10-year yield touching 3% for the first time since 1996, may keep Indian markets under pressure as investors brace for tighter global liquidity, higher crude prices and fresh inflation risks. For India, the bigger issue is that bond yields are rising together across major markets at a time when crude oil is high, the Middle East conflict is dragging on and the US Federal Reserve is again sounding hawkish on inflation.

Why Japan matters to IndiaAnalysts say Japan has long been one of the world's largest pools of savings. For years, low interest rates at home pushed Japanese money into overseas bonds and other global assets.

When Japanese yields rise sharply, that equation may change. If investors can earn better returns in Japan, even a gradual reduction in Japanese demand can push up global bond yields.

Higher global yields then make emerging markets such as India less attractive for foreign investors. Masahiko Loo, senior fixed income strategist at State Street Investment Management in Tokyo, said the move in Japan is more of a normalisation story than a crisis."

A 10-year JGB yield at 3% is undoubtedly a milestone, but I would view it more as a normalisation story than a crisis story. Markets are repricing for a higher inflation regime, a higher neutral rate and growing confidence that the BOJ has further to go," Loo said."

The other underappreciated factor is Japan. The story is not large-scale repatriation, but Japan gradually ceasing to be the marginal buyer of foreign bonds.

Less incremental demand from one of the world's largest pools of savings is helping push term premium higher globally. This is why the selloff feels more like a buyers' strike than a sellers' panic," he said.

When Japan, US and Europe yields rise together, global investors demand higher returns to hold risk assets. This can hit foreign flows into Indian equities and bonds, lift domestic bond yields, put pressure on the rupee and hurt valuation multiples in stocks..

Brent crude held near $91 a barrel, adding pressure on oil importers such as India. Higher crude can widen India’s import bill, hurt the rupee, raise inflation risks and squeeze margins for companies that use fuel or crude-linked raw materials.

Tai Hui, APAC chief market strategist at JP Morgan, said the Middle East stalemate risks pushing energy prices higher as the world moves towards the winter season." The stalemate in the Middle East risks pushing energy prices higher as we approach Q4.