MUMBAI, - Indian government bonds surged on Monday, extending last week's sharp rally, as hopes of a US-Iran peace deal drove oil prices lower and improved sentiment ahead of US and Indian inflation data due later this week.
The benchmark 6.94% 2036 bond yield settled at 7.1529%, nearly 4 basis points below Friday's close. India's debt market will be closed on Tuesday for a local holiday.
The benchmark yield plunged 22 basis points last week, its sharpest weekly drop in nearly seven years, after a Democratic sweep in the US midterm elections revived hopes for a resolution to the Iran war.
Brent crude, which tumbled more than 16% last week, fell 3.6% to $94.6 a barrel on Monday.
US President Donald Trump said fresh attacks on Iran were highly unlikely while talks progressed. Trump will meet the prime minister of key mediator Qatar on Monday as efforts to end the war ramp up.
Lower oil prices have eased concerns around India's inflation, currency and fiscal position, triggering a sharp scaling back of RBI hike expectations.
India's October consumer inflation reading, due Thursday, is forecast to rise to 5.93% from 5.54% in September, according to a Reuters poll, nearing the upper end of the RBI's 2%-6% tolerance band.
Market participants will also closely watch Tuesday's US inflation reading after stronger-than-expected jobs data bolstered bets of a Federal Reserve rate hike in December. Markets are pricing an 80% probability of a December increase, according to the CME FedWatch Tool.
"If the Fed hikes rates in December, the RBI may follow," said Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank.
India's overnight indexed swaps plunged with falling oil prices.
The 1-year OIS rate fell 5.25 bps to 6.28%and the 2-year rate dropped 4.5 bps to 6.3%. The 5-year rate slid 8.5 bps to 6.3950%.
