Updates at market open

By Dharamraj Dhutia

MUMBAI, May 6 (Reuters) - Indian government bonds rose on Wednesday as a decline in crude prices on expectations of a U.S.-Iran peace deal lifted investor sentiment and eased domestic inflation concerns.

The benchmark 6.48% 2035 bond yield IN064835G=CC was at 6.9821% as of 10:30 a.m. IST, after closing at 7.0184% on Tuesday. Bond yields move inversely to prices.

"The fall in crude has eased some pressure in the bond market, especially as investors are hopeful that U.S.-Iran tensions could cool, though they remain cautious until there is more clarity on a deal," a trader with a primary dealership said.

Oil prices eased on Tuesday and extended declines in Asian hours on Wednesday on expectations that supply from the Middle East could resume soon. O/R

On Tuesday, U.S. President Donald Trump unexpectedly said he would briefly pause an operation to help escort ships through the Strait of Hormuz, citing progress toward a comprehensive agreement with Iran, without giving details.

Despite a ceasefire, the strait, which typically carries about one-fifth of the world's oil and natural gas supply, has been largely shut since the war began on February 28.

Benchmark Brent crude has eased more than 5% since Monday's close, and was hovering around $108 per barrel in Asian hours.

Elevated energy prices are detrimental for India - the world's third-largest oil importer - as they could stoke inflation and widen the fiscal deficit.

Meanwhile, traders await a crucial debt sale on Friday, when New Delhi plans to raise 340 billion rupees ($3.58 billion)through the sale of a new 10-year paper, which would replace the existing benchmark in coming weeks.

The market anticipates the cutoff yield to be around 2 bps lower than the current benchmark.

RATES

India's overnight index swap (OIS) rates plunged, as traders unwound heavy paid positions built over the last few days.

The one-year OIS rate INR1YMIBROIS=CC was at 5.98%, while the two-year swap rate INR2YMIBROIS=CC was at 6.21%. The five-year INR5YMIBROIS=CC rate was at 6.61%.

($1 = 95.0750 Indian rupees)