Indian government bonds gained on Tuesday after oil prices fell below $100 a barrel, retreating from recent peaks and tempering concerns over inflation and higher interest rates.
India, which imports roughly 90% of its crude oil needs, is particularly exposed to swings in global oil prices, with elevated oil prices and a weak monsoon raising inflation concerns and expectations of a rate hike next month.
The benchmark 6.94% 2036 bond yield fell 4 basis points to 7.0106%.
Traders said a sustained move below 7% may prove difficult ahead of the Reserve Bank of India's rates decision in October. Bond yields move inversely to prices.
Brent crude futures were at $98.8 a barrel, extending losses for a second day after reports that Iran could reopen the Strait of Hormuz within seven days if the US eases military pressure and lifts its blockade on Iranian ports.
"A gradual broadening of price pressures is likely to keep headline inflation above 5% in the second half of the fiscal year, sharply narrowing the real rate buffer and underscoring the need for a tighter policy bias," DBS Bank said.
Separately, the liquidity surplus has narrowed as the RBI drains cash from the banking system. The central bank has sold 750 billion rupees ($7.83 billion) of bonds through open market operations and will sell another 250 billion rupees on Monday.
RATES
Overnight indexed swap rates eased 1 to 3 basis points, tracking a dip in oil prices.
The one-year rate ended at 6.0625%, the two-year closed at 6.2550% and the five-year stood at 6.5125%.
