INDIA BONDS-India bonds set to edge higher as oil dips below $100; supply to cap gains

MUMBAI, March 25 (Reuters) - Indian bonds are expected to edge higher on Wednesday after deep losses in recent sessions, as reports about the U.S. seeking a month-long ceasefire to discuss a plan to end the Middle East war pushed Brent below $100 per barrel.

The gains in bond prices may be capped before a $4 billion state debt supply later this week.

The benchmark 6.48% 2035 bond yield IN064835G=CC will likely hover between 6.82% and 6.89%, a private bank trader said, after ending 3 basis points higher at 6.8681% on Tuesday. Bond yields move inversely to prices.

The benchmark Brent crude contract eased to $97.15 on Wednesday as a ceasefire would ease supply disruptions from the key Middle East producing region.

U.S. President Donald Trump said on Tuesday the U.S. was making progress in negotiating an end to the war with Iran, while a source confirmed that Washington had sent Iran a 15-point settlement proposal.

The war has led to a halt in shipments of oil and liquefied natural gas through the Strait of Hormuz, which typically carries about one-fifth of the world's gas and crude supply, causing the biggest-ever oil supply disruption, the International Energy Agency said.

"Oil is the largest trigger for now so there should be some positive move, but any strong rally in bonds is unlikely as the situation still remains uncertain, and traders would want to avoid heavy positions before the financial year-end," the trader said.

Elevated oil prices are detrimental for India, the world's third-largest crude importer, threatening to worsen domestic inflation and widen the current account deficit.

Meanwhile, Indian states will raise 395.4 billion rupees ($4.21 billion) through bond sales on Friday, after already raising 12.31 trillion rupees in this financial year.

RATES

India's overnight index swap (OIS) rates are expected to see some receiving.

The one-year OIS rate INR1YMIBROIS=CC ended at 5.9450% and the two-year OIS rate INR2YMIBROIS=CC closed at 6.1350%. The liquid five-year swap rate INR5YMIBROIS=CC settled at 6.4950%.

($1 = 93.8780 Indian rupees)