Indian government bond prices rose in early trading on Friday, supported by gains in US Treasury yields overnight and falling oil prices, while traders remained cautious ahead of a large government bond auction later in the day.

Foreign investor purchases continued to support the market, after they recorded net purchases of 15 billion rupees on Thursday, according to Reuters.

Total foreign investor purchases have reached about $4 billion since early June, driven by expectations of Indian bonds' inclusion in the Bloomberg Global Aggregate Index, following policy measures that boosted these expectations.

The yield on the benchmark 2036 bond, which was at 6.94%, fell by two basis points to 6.7348% by 11:10 a.m. India time. The yield is expected to end the week higher, ending a six-week consecutive decline.

Bond yields move inversely to prices.

The yield has ranged between 6.68% and 6.77% this week, with buyers dominating trading in the last two sessions.

Brent crude fell more than 2% to around $76 per barrel, compared with about $80, while the yield on the 10-year US Treasury note closed about three basis points lower on Thursday, before partially recovering losses in Asian trading.

Lower oil prices are a direct positive for India, the world's third-largest oil importer and consumer, as it eases pressure on inflation, the current account, and the rupee.

The decline in US Treasury yields also helps maintain the risk premium offered by Indian bonds, enhancing their appeal to foreign investors seeking yields in emerging market debt.

A trader at a private bank said: 'Foreign investor purchases have helped limit modest declines, but the auction results will determine whether investors will continue to increase their exposure to long-term bonds. The final pricing levels and the amount of foreign demand during the auction will be the key indicators for market direction.'

The Indian government is set to raise 320 billion rupees ($3.36 billion) through the sale of benchmark five-year treasury bonds, along with other bonds maturing in 40 years.

Interest rates

Overnight interest rate swaps in India fell significantly, as lower oil prices and a stable rupee boosted expectations of an improving inflation trajectory, which reduced bets on interest rate hikes.