Indian equity benchmarks reversed some of the sharp losses from earlier in the session to end only a touch lower on Tuesday, even as global markets were jolted after the Bank of Japan's (BOJ) unexpected hawkish shift set shock waves through risk assets.
The BSE Sensex index fell 103.90 points, or 0.17 per cent, to close at 61,702.29, and the broader NSE Nifty declined 35.15 points, or 0.19 per cent, to end at 18,385.30.
But the yen surged, and Asian markets tumbled after the BOJ unexpectedly adjusted its bond yield limits, allowing long-term interest rates to increase further.
Tuesday is not likely to see an end to the turmoil.
The biggest creditor in the world, Japan, may see a tsunami of cash come home if domestic financial conditions continue to tighten.
That comes at a time when the outlook for the economy is deteriorating and poses a threat to driving down asset prices and raising global borrowing costs.
According to UBS Group AG, investors are anticipated to withdraw from bonds in the US, Australia, and France, and developed-market equities are also anticipated to decrease.
"This was bound to happen with inflation rising in Japan. It's just happened sooner than many thought," Amir Anvarzadeh, an Analyst at Asymmetric Advisors in Singapore, who has tracked Japanese markets for three decades, told Bloomberg.
"It could spark money flowing back into Japan. It will force Japanese investors to raise the hedging on their dollar exposure, which in turn strengthens the yen and becomes a self-fulfilling prophecy of more yen strength."
After the BOJ also announced unplanned debt-purchase operations, the benchmark 10-year yield in Japan increased by as much as 21 basis points to 0.46 per cent before falling to 0.4 per cent.
The Osaka Exchange briefly stopped trading in Japanese bond futures when they reached a circuit breaker threshold. The yen soared to 132.28 per dollar, up as high as 3.5 per cent.
"In theory, it's not a tightening in monetary policy as the yield target is still zero and the BOJ says it will step up bond buying," Shane Oliver, Head of Investment Strategy at AMP Services in Sydney, told Bloomberg.
"But, it will be seen as a move in that direction by many, adding to the hawkish bias from global central banks seen last week, hence the spike in the yen and adverse impact on global share markets."
Meanwhile, investors have been extremely concerned about China's reopening to the rest of the world following nearly three years of Covid lockdowns, driven by a fresh surge in new cases.
On Monday, Credit Suisse changed its assessment of China's stock markets for the coming year from neutral to outperform.
"The whole narrative of China has changed, it's gone from COVID zero that was putting the economy under pressure, and there's now an intention to move towards a reopening," Suresh Tantia, Credit Suisse's Senior Investment Strategist, told Reuters.
"And as that happens, we will see a recovery in China's economy and markets."
Apart from China's reopening concerns, investors generally believe that US interest rates may rise more than expected in 2023.
William Dudley, a former Federal Reserve official, said on Monday it was likely that rates might rise even as US unemployment began to inch up.
"We might not get much of a Santa Claus stock market rally as Wall Street rushes to price in credit and earnings risks," OANDA analyst Edward Moya wrote, according to Reuters.
The S&P 500, the Dow, and the Nasdaq are on pace to post their greatest yearly percentage losses since the lowest point of the global financial crisis in 2008.
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