Updates at market open

By Khushi Malhotra

MUMBAI, Feb 3 (Reuters) - Indian government bonds rallied in early trade on Tuesday, as a U.S.–India trade deal sparked fresh buying on hopes that a firmer rupee could draw in more foreign inflows across local markets.

Profit taking, however, capped major moves across bonds, with investors focussed on demand-supply dynamics and the central bank's monetary policy decision due this week.

Bonds have been battered by the federal budget's projection of a record market borrowing in the next fiscal year, which pushed the benchmark 10-year 6.48% 2035 bond yield IN064835G=CC to its highest in over a year in the previous session.

The bond yield was at 6.7302% as of 10:10 a.m. IST against 6.7662% at the previous close.

U.S. President Donald Trump late on Monday announced a much-awaited trade deal with India that slashes U.S. tariffs on Indian goods to 18% from 50%.

"This development is likely to improve the country's balance of payments gap, strengthen the rupee, increase foreign exchange reserves and attract foreign institutional investors," said Deepak Agrawal, chief investment officer - debt, at Kotak Mutual Fund.

With trade deal talks stalled through most of 2025, the rupee had become Asia's worst-performing currency, sliding nearly 5% over the year and more than 2% last month. On the day, the rupee rose 1.3% to 90.32 against the dollar.

The Reserve Bank of India had to step in, balancing its liquidity support to the local banking system with defending the rupee.

The RBI is widely expected to keep rates unchanged on Friday. Traders await its commentary on rupee liquidity and bond purchases.

RATES

India's overnight index swap rates saw aggressive receiving as traders reversed paid bets after the trade deal.

The one-year OIS rate INR1YMIBROIS=CC fell 2 bps to 5.52%, while the two-year rate INR2YMIBROIS=CC dipped 5.75 bps to 5.6650%. The five-year OIS rate INR5YMIBROIS=CC declined to 6.1325%, down 6.5 bps.

(Reporting by Khushi Malhotra; Editing by Eileen Soreng and Mrigank Dhaniwala)

((Khushi.malhotra@tr.com))