Indian government bonds rose on Thursday as investors bought after the previous session's selloff, even as higher oil prices and U.S. Treasury yields kept gains in check following a renewed escalation in the U.S.-Iran conflict.
The benchmark 6.94% 2036 bond yield fell one basis point to end at 6.7517% on Thursday.
Traders cited likely buying by foreign banks, which had cut exposure on Wednesday.
Foreign lenders bought 402 billion rupees of Indian government bonds in June, their biggest monthly purchase in a year, after recent policy measures to attract inflows. They had been net sellers since November 2025.
The U.S. military launched fresh strikes on Iran on Wednesday, prompting retaliatory attacks on Kuwait and Bahrain, both home to U.S. military bases, and raising doubts over a fragile ceasefire.
Brent crude futures have risen more than 6% since the latest escalation to about $78 a barrel, while U.S. Treasury yields have climbed about 6 basis points over the past two sessions.
The 10-year bond yield jumped 7 basis points on Wednesday, its biggest one-day rise in more than three months, prompting investors to step in.
"The language used by both sides spooked the market and triggered a flight to safety," said Alok Singh, head of treasury at CSB Bank.
"I expect both bonds and rupee to retrace if the war doesn't escalate further."
Persistent overseas inflows have supported sentiment, with foreign investors having bought $3.82 billion of Fully Accessible Route bonds since the start of June, on rising expectations that India's debt will enter Bloomberg's Global Aggregate Index.
RATES
India's overnight index swap rates ended little changed as traders stayed cautious.
The one-year rate was up xx bps at 5.81%, while the two-year rate was at 5.96%. The most liquid five-year rate was at 6.21%.
