INDIA BONDS-India bonds rise as hawkish RBI fears ease, outweighing war concerns

By Khushi Malhotra

MUMBAI, April 7 (Reuters) - Indian government bonds rose on Tuesday as easing fears of a hawkish central bank policy decision outweighed concerns that the war in the Middle East could escalate further.

The benchmark 6.48% 2035 bond yield IN064835G=CC hovered around 7.0353% as of 11:20 a.m. IST, compared with its previous close of 7.0458%. It hit a high of 7.083% earlier in the day.

The note logged its biggest single-session fall in 15 weeks on Monday.

The note faced selling pressure in early deals as New Delhi decided to continue its 340-billion-rupee ($3.66 billion) auction on Friday, even though most of the market had expected a new 10-year bond to be introduced.

The selling eased later as the market priced in a less hawkish outcome in the Reserve Bank of India's policy decision on Wednesday, traders said.

"Despite swaps market pricing in 1.5 rate hikes in the April meeting and another hike in June, expecting the RBI to react aggressively to tame oil-price driven inflation, we believe that the central bank is likely to hold the repo at 5.25%," said Apoorva Javadekar, chief economist at Muthoot FinCorp.

Bond yields and swap rates eased on Monday as they bet on the acceptance of a peace proposal. Tehran, however, rejected a ceasefire and said a permanent end to the war was necessary.

U.S. President Donald Trump has warned Iran could be "taken out" if it did not meet his Tuesday deadline to reach a deal, stoking fears of a wider conflict.

Oil prices extended gains on Tuesday, with benchmark Brent crude futures last at $111 a barrel. O/R

A sustained rise in crude prices will pose higher inflation risks and tepid growth for oil-importing India, and have already battered its currency and bond markets.

RATES

India's overnight index swap (OIS) rates extended their fall on Tuesday, tracking bonds.

The one-year OIS rate INR1YMIBROIS=CC was down 5 bps at 6.13%, while the two-year rate INR2YMIBROIS=CC fell 8 bps to 6.32%.

The most liquid five-year rate INR5YMIBROIS=CC eased 6 bps to 6.64%.

($1 = 92.9500 Indian rupees)