Updates post market open

By Khushi Malhotra

MUMBAI, June 15 (Reuters) - Indian government bonds rallied early Monday, sending the 10-year benchmark yield to a 12-week low, after a long-awaited U.S.-Iran agreement knocked oil back toward levels last seen near the war's onset.

Brent crude tumbled 4.5% to $83.40, the lowest since March 10, after Washington and Tehran clinched a preliminary deal to end the war and reopen the Strait of Hormuz. Oil prices have whipsawed since the conflict began on February 28, surging as high as $120 a barrel.

Elevated crude prices have posed a key risk to India's public finances, pressuring assets in the world's third-largest oil importer.

The yield on the benchmark 6.94% 2036 note IN069436G=CC dropped 3.2 basis points to 6.8637% by 11:10 a.m. IST, its lowest intraday level since March 25. The yield is now 20 basis points above pre-war levels.

The U.S. 10-year yield also fell nearly 6 bps to 4.42% in Asian trade.

The Indian rupee was also trading near a five-week high at 94.5750 per dollar.

In its June policy decision, the Reserve Bank of India held rates steady while unveiling measures to boost foreign inflows and stem the rupee's slide.

Kotak Mahindra Bank estimates the steps could draw about $75 billion in cumulative capital inflows and bring the balance-of-payments gap close to neutral, from a previously estimated $75 billion deficit, easing a key overhang on sentiment.

Traders are now watching for India's inclusion in the Bloomberg Global Aggregate Index, with Bloomberg Index Services expected to review the inclusion again this month.

Foreign investors have poured more than $1.6 billion into Indian bonds over the past six sessions.

RATES

India's overnight index swap rates slipped further, tracking a slump in oil prices.

The one-year swap rate INR1YMIBROIS=CC dropped 5 bps to 5.9175%, while the two-year rate INR2YMIBROIS=CC fell 6.5 bps to 6.06%. The five-year rate INR5YMIBROIS=CC pared 5.75 bps to 6.29%.