INDIA BONDS-Indian bonds move a tad higher as oil stabilises, Fed's rate decision in focus

(Updates at market open)

By Dharamraj Dhutia

MUMBAI, March 18 (Reuters) - Indian government bonds were trading slightly higher in early deals on Wednesday, as oil prices stabilised, while traders awaited the U.S. Federal Reserve's monetary policy decision later in the day.

The benchmark 6.48% 2035 bond yield was at 6.7022%, as of 10:15 a.m. IST, after ending the previous session at 6.7143%. Bond yields move inversely to prices.

The Indian bond market will remain shut on Thursday for a local holiday.

"We do not expect any sharp one-way move, as traders are avoiding undue risk ahead of a holiday and with the financial year-end approaching," a trader at a private bank said.

The benchmark Brent Crude held above $100 per barrel on supply concerns, with the Strait of Hormuz remaining mostly shut and no end in sight for the Middle East war.

The contract has surged more than 40% since the U.S.-Israeli war on Iran began about a fortnight ago, as it disrupted traffic through the Strait.

Still, there has been no major price flare-up despite the war, which has given some confidence, traders added.

Meanwhile, the 10-year U.S. Treasury yield stayed close to 4.20% ahead of the Fed's decision, with markets widely expecting it to leave its benchmark overnight rate unchanged in the 3.50% to 3.75% range.

Expectations for rate cuts in 2026 have been pared back, with markets now pricing in around 25 basis points of reductions this year, compared with over 50 bps before the war began.

Commentary from Fed members on the impact of the ongoing war on interest rates and the broader economy will be eyed.

The Reserve Bank of India will also auction treasury bills worth 340 billion rupees ($3.68 billion) later in the day.

RATES

India's overnight index swap (OIS) rates moved lower as receiving interest persisted.

The one-year OIS rate eased to 5.77%, while the two-year OIS rate declined to 5.96%. The five-year swap rate was down to 6.36%.

($1 = 92.4250 Indian rupees) (Reporting by Dharamraj Dhutia; Editing by Janane Venkatraman and Rashmi Aich)