Indian government bonds declined for a second straight session on Tuesday, surrendering gains made after the central bank's policy decision two weeks ago, as elevated oil prices compounded the impact of the early closure of a deposit scheme.

The yield on the benchmark 6.94% 2036 bond ended at 6.8269%, after closing at 6.8071% on Monday, up 5 basis points from Monday, its sharpest increase in more than a month.

The 10-year bond yield had fallen to around 6.76% after the Reserve Bank of India's dovish policy tilt on August 5.

On Friday, the RBI said it would close a zero-cost swap facility a month early, ending a hedge offered to banks in June for foreign-currency deposits raised from non-resident Indians.

Better-than-expected inflows from the scheme, which topped $50 billion, prompted the early close, while policymakers were also wary of its effect on domestic liquidity.

"With the FCNR(B) window closing earlier than initially planned, the incremental liquidity support for bonds is likely to diminish, particularly after the strong inflows already mobilized," Nuvama said in a note.

"Going forward, bond yields are likely to be driven more by global and domestic factors, including elevated Brent crude, US Treasury yields, geopolitical developments and expectations around US-Iran negotiations, as well as domestic liquidity conditions and RBI policy," it added.

The benchmark Brent crude contract touched nearly $92 per barrel during Asian trade, after the 60-day U.S.-Iran ceasefire expired on Monday, with neither side indicating an intention to renew it.

India, the world's third-largest oil importer, is especially vulnerable to oil price gyrations, as elevated oil prices worsen inflation, the current account, and the government's fiscal arithmetic.

RATES

India's overnight index swap rates also surged for a second session, with paying bias across the curve, underscoring the hit to market sentiment from the RBI's move.

The one-year swap ended at 5.83%, while the two-year rate closed at 6.0550%, and the liquid five-year rate settled at 6.42%.

Swap rates have jumped 10-17 bps so far this week.