Indian government bonds surged on Friday, buoyed by a sharp drop in crude prices after U.S. President Donald Trump revived hopes of a breakthrough with Iran, though domestic fiscal concerns limited gains.
The yield on the benchmark 6.94% 2036 note shed 2.8 basis points to 6.8957%, its lowest since issuance in May.
A U.S.-Iran memorandum to halt the Gulf war could be signed as early as Sunday, a source told Reuters on Friday, adding that the text was still being finalised.
The prospect of a deal pushed Brent crude futures down over 3% to $87.28 per barrel, the lowest since April 7.
India is the world's third-largest oil importer and consumer and is its economy and assets are highly vulnerable to price swings.
The day's gains were limited due to fiscal slippage concerns after Bloomberg News reported that India may be willing to let the budget gap widen by as much as 50 bps to 4.8% of GDP for this fiscal year.
Separately, India's retail inflation rose to 3.93% year-over-year in May from 3.48% in April, but was below the 4% projected in a Reuters poll.
Bonds are likely to consolidate and trade within a 10 basis-point range, said Alok Singh, head of treasury at CSB Bank.
Investors continued to assess the Reserve Bank of India's measures aimed at attractingforeign inflows, supporting the rupee, and strengthening external balances.
State Bank of India and Bank of Baroda are set to become the first users of the RBI's subsidised hedging window for overseas borrowings, with plans to raise about $1 billion through five-year dollar bonds.
India's measures to improve the attractiveness of its debt are welcome, though concerns over oil prices and their impact on the rupee remain hurdles in drawing foreign investors to government bonds, a top official at BlackRock said.
RATES
India's overnight index swaps eased, tracking falling oil prices.
The one-year swap fell 5.75 bps to 5.9650%, while the two-year rate dropped 8 bps to 6.1150%. The more liquid five-year rate shed 9 bps to 6.3375%.
