Indian government bonds were a tad lower in choppy early trading on Tuesday, as a fresh escalation in U.S.-Iran tensions reversed oil's direction and softer Treasury yields supported bulls.
The benchmark 6.48% 2035 bond yield was at 7.0343%, as of 10:00 a.m. IST, after ending at 7.0270% on Monday. Bond prices move inversely to yields.
"We could be in a narrow range of 7.01%-7.05% today and tomorrow, if oil prices remain around the current levels, and demand for the weekly auction could sway the market on Friday," a trader with a primary dealership said.
New Delhi to raise 280 billion rupees ($2.93 billion) through the sale of bonds on Friday, including the 6.68% 2040 bond, which led the selling in Tuesday's trading.
Oil prices moved higher with the benchmark Brent crude around $98 per barrel in Asian hours after the U.S. military carried out strikes in southern Iran in what it described as defensive actions.
This has again raised concerns among market participants about the prospect of a sustainable peace deal between the two warring nations.
This comes after U.S. President Donald Trump said on Saturday that Washington and Iran had largely negotiated a memorandum of understanding for a peace deal that would reopen the Strait of Hormuz.
Analysts have cautioned that even if a deal is finalised, a full recovery in energy flows is unlikely to be immediate, and shipping could take months to normalise.
Elevated oil prices impact India's inflation, current account deficit, and the government's fiscal maths, while adding pressure on the central bank to hike interest rates.
Economists at Standard Chartered, ANZ, and MUFG now expect the RBI to start hiking rates as early as June 5, while expecting another similar move in August.
RATES
India's overnight index swap rates moved higher, tracking oil and yield moves.
The one-year swap was at 6.16%, while the two-year rate rose to 6.3850, and the five-year rate was at 6.69%.
($1 = 95.4250 Indian rupees)
