Indian government bonds ended flat on Tuesday after the previous session's sharp rally, as a hefty supply of 10-year notes later this week and the looming Federal Reserve policy decision kept risk appetite in check.
The benchmark 6.94% 2036 bond yield erased its early fall to end at 6.7774%. It settled at 6.7739% on Monday.
Bond yields move inversely to prices.
Sentiment was initially buoyed by 2% decline in Brent crude to $86.65 a barrel and the 10-year U.S. Treasury yield's more than 2-basis-point fall in the Asian trade.
Traders turned cautious ahead of the Fed's rate decision due late Wednesday, where it is expected to hold rates. However, money markets are pricing a high probability of a 25-bp hike in September.
"More than the outcome, people will watch the statement for cues on the future course of rate hikes," said Alok Singh, head of treasury at CSB Bank.
Singh said 6.74% is a key resistance level for the Indian 10-year yield and could break if oil prices decline further.
Geopolitical uncertainty persisted after Oman won Gulf backing for a plan allowing Tehran to collect voluntary fees for the use of the Strait of Hormuz, a Gulf source told Reuters.
U.S. President Donald Trump said "good talks" were under way with Iran, while Tehran denied resuming negotiations with Washington.
A 340-billion-rupee sale of 10-year paper on Friday also kept traders on the sideline.
State-run banks likely continued selling bonds on Tuesday after offloading 33.7 billion rupees ($351.58 million) on Monday to book profits, traders said.
RATES
India's overnight index swaps eased, tracking lower oil prices and U.S. Treasury yields, while traders awaited the Fed's guidance.
The one-year swap rate eased slightly to 5.8825%, while both the two-year rate and the five-year rate fell nearly 1 bp to 6.0650% and 6.35%, respectively.
