Indian government bonds fell on Wednesday, ending a four-day rally, as fears of escalation in the Middle East war sent oil prices higher, while some traders booked profits.
The yield on the benchmark 6.94% 2036 note settled at 6.9431%, up from 6.9163% on Tuesday. It had eased around 10 basis points in the previous four sessions.
U.S. President Donald Trump said on Wednesday Iran had taken too long to negotiate a deal and would now "have to pay the price."
Tehran said it would reassess diplomatic engagement with Washington after tit-for-tat strikes overnight.
Oil prices rose 1% in Asian trade to $92.61 per barrel, keeping investors wary of inflation risks for India, which imports most of its crude oil.
The conflict has effectively choked the Strait of Hormuz, a key global oil conduit, pushing up energy prices and straining India's external balances.
India unveiled a wide-ranging set of measures to draw in overseas capital last week to shore up the currency and the country's external balances, both of which have been strained by higher oil prices.
Foreign inflows have picked up since the measures were introduced, with more than $1 billion worth of government debt bought by foreign investors in just three sessions. Leading up to the announcement of the measures on Friday, foreign investors had bought only a net $1.6 billion since the start of the year.
"Inflation risks linked to energy prices, geopolitical developments and weather-related uncertainties could keep policy tight if pressures persist," said Ashwin Patni, head of wealth management solutions at Julius Baer India.
"This may keep foreign investors cautious in the short term despite the supportive policy measures."
Traders also await May U.S. inflation data due later in the day, with futures fully pricing in a 25-basis-point Federal Reserve rate hike in December.
RATES
India's overnight index swap rates rose on some reversal in receive positions and war risks.
The one-year swap ended 8.5 bps higher at 6.0775%, while the two-year rate rose 5 bps to 6.2325%. The five-year rate settled at 6.48%, up 5 bps.
