India bonds fall as Middle East escalation drives oil above $90

Overnight index swaps ended higher in a choppy session.

The one-year swap ended 1.75 bps higher at 5.9675%, while the two-year rose 2.5 bps to 6.1375% and the five-year jumped 3.5 bps to 6.44%.

($1 = 96.4400 Indian rupees)

U.S. forces bombed targets in southern Iran after President Donald Trump said Tehran would pay dearly for the deaths of American soldiers. Iran struck U.S. sites in Bahrain, Kuwait and Jordan, while a tanker was hit in the Strait of Hormuz. The attacks came a day after Yemen's Iran-aligned Houthis said they would impose a naval blockade on Saudi Arabia.

Cut-off yields at the weekly state debt auction were sharply above market expectations, with some states accepting only partial amounts.

The yield curve also steepened as liquidity from FCNR flows supported the short end, while oil risks weighed on bonds with longer maturities.

In its first update since the scheme was launched in early June, the RBI said the measures it announced in June had mobilised $20.72 billion through July 17.

The strong response is adding to confidence that India's balance of payments will remain in surplus this fiscal year, even as volatile crude prices pose risks, economists said.

Indian government bonds slipped on Tuesday as rising crude prices and higher-than-expected cut-off yields at a state debt auction undercut positive sentiment from strong inflows drawn by the Reserve Bank of India's overseas deposit scheme.

Brent crude rose 1% to $90.16 a barrel, pressuring Indian assets as higher oil prices threaten to stoke inflation and widen the import bill for the world's third-largest oil importer.