MUMBAI: Indian bonds rebounded from session lows to snap a three-day fall on Tuesday as good buying from state-run banks following a recovery in the rupee helped, while some easing in global crude oil prices also underpinned sentiment.
The rupee recovered from a one-and-a-half month low after the central bank chief assured investors that India is ready to deal with any external shocks arising from the Iraq crisis, even as a spike in oil prices heightens the inflation, growth and budget risks facing new Prime Minister Narendra Modi.
Oil futures fell towards $112 per barrel on Tuesday, pressured by signs of a thaw in relations between Iran and the West although market players saw scope for gains if violence in Iraq threatened production from OPEC's second-biggest producer.
"Iraq is not so much of a concern as is the supply that is lined up. With no foreign investors to support government debt buying, we will have to see how things go," said Bekxy Kuriakose, head of fixed income at Principal PNB Asset Management.
Foreign investors have used up 98.5 percent of the total investment limit in local government bonds as on Monday, meaning they can no longer continue to buy debt, unless some of these limits get freed up due to maturing debt or some selling.
Though there have been expectations of a hike in the foreign investor limits in local debt, any call is unlikely to be taken ahead of the budget due by mid-July, traders said.
The benchmark 10-year bond yield closed down 5 basis points on the day at 8.60 percent. The 10-year yield rose as high as 8.67 percent in early trade, its highest level since June 3.
Traders will continue to monitor the developments in Iraq and closely track global crude oil prices as also the rupee for near-term direction.
The outcome of the US Federal Reserve's two-day policy meeting due on Wednesday evening will also be watched.
In the overnight indexed swap market, the benchmark five-year swap rate closed down 3 basis points at 7.82 percent while the one-year rate ended 1 basis point lower at 8.28 percent.
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