INDIA BONDS-India bonds set to pare gains as elevated oil, war uncertainty weigh

By Dharamraj Dhutia

MUMBAI, April 7 (Reuters) - Indian government bonds are expected to pare some of the previous session's gains on Tuesday as firm oil prices and persistent uncertainty over a potential resolution to the Middle East war kept sentiment cautious.

Still, major moves may not be on the cards ahead of the Reserve Bank of India's monetary policy decision on Wednesday.

The benchmark 6.48% 2035 bond yield IN064835G=CC will likely trend between 7.03% and 7.09%, a private bank trader said, after ending at 7.0458% in the previous session.

The yield posted its biggest single-day decline in 15 weeks on Monday. Yields move inversely to bond prices.

"After the initial opening levels, we don't expect any large moves on either side," the trader said.

Oil prices extended gains on Tuesday as U.S. President Donald Trump threatened stronger action against Iran if it fails to reopen the Strait of Hormuz, a key oil chokepoint, responsible for one-fifth of global transit of oil. O/R

Bond yields and swap rates fell on Monday on rising bets over the success of peace talks between the warring countries.

The 10-year bond yield is up 39 basis points since the U.S. and Israel started the war on Iran on February 28, reflecting persistent worries over the disruption of oil supply.

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

Meanwhile, Indian states will raise 181.59 billion rupees ($1.95 billion) through the sale of debt later in the day, after tweaking their issuance pattern, with nine states announcing the maturity bucket for their planned bond sales for the quarter.

New Delhi will sell the benchmark paper worth 340 billion rupees on Friday, though most market participants had anticipated a new 10-year debt sale.

RATES

India's overnight index swap (OIS) rates are also likely to reverse some part of Monday's fall amid elevated oil prices. The one-year OIS rate INR1YMIBROIS=CC ended at 6.18%, while the two-year rate INR2YMIBROIS=CC closed at 6.40%.

The most liquid five-year rate INR5YMIBROIS=CC eased to 6.6950%.

($1 = 93.0600 Indian rupees)