Indian government bonds extended their rally for a second consecutive session on Thursday, driven by a trifecta of steady oil prices, fading bets on U.S. interest rate hikes, and anticipation of a major milestone in global index inclusion. The benchmark 6.94% 2036 bond yield fell 2.5 basis points to close at 6.7478%, reflecting improved investor sentiment. Main Developments Brent crude oil prices stayed below $85 per barrel in Asian trade, snapping a three-day rising streak despite ongoing hostilities in the Gulf region. This stability eased macroeconomic concerns about India's fiscal deficit and government subsidies, which are directly tied to oil costs. U.S. Treasury yields fell overnight after softer economic data reduced expectations of Federal Reserve rate hikes, further supporting Indian bond sentiment. On the domestic front, several economists have scaled back calls for a rate hike by the Reserve Bank of India as the inflation outlook improved. Read also: Jio Financial Services Q1 Profit More Than Doubles on Broad Growth India's overnight index swaps also eased, with the 1-year rate dropping 4.25 basis points to 5.89%, the 2-year rate falling 5.5 basis points to 6.0650%, and the 5-year rate declining 4.5 basis points to 6.3375%. Focus now shifts to New Delhi's 320-billion-rupee ($3.32 billion) bond auction on Friday for further directional cues. Background Indian bonds have been gaining momentum as foreign investors pour money into FAR-eligible government securities—bonds that meet the Fully Accessible Route criteria—with inflows exceeding $4.2 billion since June 1. These purchases were supported by India's policy measures to boost dollar inflows and expectations of index inclusion. FAR-eligible Indian bonds are already part of three emerging-market indices. The potential addition to Bloomberg's Global Aggregate Index, expected to be decided this month, would mark their first entry into a global investment-grade debt benchmark. Why It Matters Steady oil prices reduce pressure on India's import bill and fiscal deficit, which in turn lowers the government's borrowing costs and subsidy burden. For bond investors, crude remains the critical variable, as Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank, noted: "For bonds, crude remains the key variable because of its impact on fiscal deficit and government subsidies." The potential Bloomberg index inclusion could unlock significant foreign demand, further lowering yields and making Indian debt more attractive to global investors. This would also strengthen India's integration into global financial markets. What's Next Market participants await Bloomberg's decision on adding Indian debt to its Global Aggregate Index, expected this month. Traders will also closely watch Friday's bond auction for demand signals, which could confirm or challenge the current bullish sentiment.