(Updates at market open)
By Khushi Malhotra
MUMBAI, April 17 (Reuters) - Indian government bonds drifted lower early on Friday ahead of a heavy debt sale, while firm oil prices kept inflation risks elevated, even after U.S. President Donald Trump said the Iran war could end soon.
India’s benchmark 6.48% 2035 bond yield (IN064835G=CC) was at 6.9056% as of 11:45 a.m. IST. It settled at 6.8884% on Thursday. Bond yields move inversely to prices.
New Delhi will sell 320 billion rupees ($3.44 billion) worth of 5-year and 40-year notes later in the day.
“Demand and risk appetite in the weekly auction will decide the direction of yields,” a private bank trader said.
Meanwhile, Trump expressed confidence that an agreement could soon be reached to end the war following a 10-day truce that went in to effect ​between Lebanon and Israel.
Still, benchmark Brent crude futures hovered near $100 a barrel as the Straight of Hormuz continued to be shuttered, choking off roughly one-fifth of the world’s oil supply.
Higher oil prices threaten to cloud import-dependent India’s inflation and growth outlook.
Rising U.S. Treasury yields also weighed on Indian bonds. The U.S. 10-year yield edged higher for a third day at 4.3193% during Asian hours.
Separately, India’s central bank has urged state-run oil refiners to curb spot dollar purchases and tap a special credit line for their foreign exchange needs, Reuters reported.
The rupee was up 0.6% at 92.66 per U.S. dollar. A stronger currency supports Indian bonds by easing inflation risks, reducing pressure on the central bank to keep rates elevated, and improving the appeal of debt for foreign investors.
<h3>RATES</h3>
India’s overnight index swap rates surged, with a paying bias as U.S. and domestic yields rose.
The one-year OIS rate (INR1YMIBROIS=CC) was steady at 5.80% on Thursday, while the two-year swap rate (INR2YMIBROIS=CC) was at 6.02%. The liquid five-year (INR5YMIBROIS=CC) rate rose 5 bps to 6.42%. ($1 = 92.9860 Indian rupees)

INDIA BONDS-India bonds fall as debt sale looms, oil risks weigh