India bonds end tad higher on softer oil

Brent crude plunged more than 7% on Monday to $104.80 a barrel after talks between Iranian and Qatari officials rekindled hopes of a peace deal and steadier Middle East supplies. It rebounded to around $106 on Tuesday after reports that the United States struck Iran's Qeshm Island.

As the world's third-largest oil importer, India is especially vulnerable to elevated crude prices, which can stoke inflation, undermine the rupee and cloud the fiscal outlook.

Indian government bond yields have seen a slight uptick, predominantly influenced by the volatile crude oil market and geopolitical tensions. The market reacted sharply to recent US-Iran conflict reports. Traders are now closely watching the upcoming US midterm elections, which could impact Congressional dominance. As economic conditions evolve, the demand for state-debt auctions remains a key focus, with investors showing caution amid global uncertainties.

Traders are also recalibrating expectations for the Reserve Bank of India's rate path, as softer oil could temper domestic inflation risks and ease pressure on debt markets globally.

The benchmark 6.94% 2036 bond yield dropped 1 basis point to 7.3012%, its lowest since October 9. It dropped nearly 10 bps in the previous session, in its biggest one-day decline since early April.

The yield briefly touched a low of 7.2780% before profit booking trimmed gains.

"7.25% on the 10-year yield is the next crucial level, which if breached, may lead to 7.15%," said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank, adding that the US midterms and their impact on the US-Iran conflict and crude trajectory will decide further moves in bonds.

Investors are closely watching the US midterm elections, which will determine whether Republicans retain control of Congress during Trump's final two years in office or cede majority control to Democrats, an outcome that could have a bearing on the US-Iran war.

India's overnight indexed swap rates declined as falling oil revived receiving interest.

The one-year OIS fell 3 bps to 6.63%, the two-year eased 3.75 bps at 6.64%, and the five-year dropped 5 bps to 6.7275%.