Updates at market open

By Dharamraj Dhutia

MUMBAI, May 25 (Reuters) - Indian government bonds edged higher early on Monday after Brent crude fell below $100 a barrel on hopes of a U.S.-Iran peace deal and a possible restoration of supplies.

The benchmark 6.48% 2035 bond yield IN064835G=CC stood at 7.0293% at 10:00 a.m. IST after closing at 7.0917% on Friday. Bond yields move inversely to prices.

"Oil prices had become the major bone of contention and kept on adding to bearish bets, with some even believing that the central bank may need to start its rate hiking cycle from next month," trader with a primary dealership said.

Sentiment improved after U.S. President Donald Trump said on Saturday that Washington and Iran had "largely negotiated" a memorandum of understanding on a peace deal that could eventually allow the Strait of Hormuz top open up.

However, analysts have cautioned even if a deal is finalised, a full recovery in energy flows is unlikely to be immediate, expecting it could take months for shipping through the strait to normalise.

The benchmark Brent crude contract was trading around $98 per barrel, a level still high enough to keep inflation risks in focus. Elevated oil prices impact India's inflation, current account deficit as well as the government's fiscal math.

The RBI monetary policy decision is due on June 5, and even though most economists are not expecting any rate action, economists at Standard Chartered Bank and MUFG are among the first to call for a hike to manage currency, inflation expectations and capital outflows. They expect 25 basis-point hikes each in June and August.

RATES

India's overnight index swap rates plunged, led by the shorter end of the curve tracking moves in oil as well as yields.

The one-year swap INR1YMIBROIS=CC was at 6.16%, while the two-year rate was at 6.38%, both down by 14 bps each. The five-year rate INR5YMIBROIS=CC was at 6.70%.