Indian government bond yields saw a downward trend on Monday, mirroring the retreat in oil prices as geopolitical tensions eased, providing relief for market participants.

The benchmark 10-year yield ended at 7.1890 per cent, marking a decrease from the previous session's closing of 7.2278 per cent.

Last week witnessed the yield settling higher for the third consecutive week, driven by escalating tensions in the Middle East and apprehensions regarding the timing of US interest rate adjustments, which impacted investor sentiment.

According to Puneet Pal, head of fixed income at PGIM India Mutual Fund, the recent uptick in U.S. inflation and the rise in U.S. bond yields have exerted pressure on global yields, including those in India, with foreign portfolio investors (FPI) witnessing outflows from Indian bonds for the first time in seven months.

Pal added, "The global monetary tightening cycle has effectively ended, and the likelihood of further rate hikes in the U.S. remains minimal despite the hawkish stance of some Federal Open Market Committee members."

Oil prices observed a decline of over 1 per cent on Monday, as market attention shifted towards fundamentals following indications from Israel and Iran downplaying the risk of heightened hostilities post Israel's relatively minor strike on Iran.

The decrease in oil prices bodes well for India's retail inflation, considering its status as a significant oil importer, and may facilitate the Reserve Bank of India (RBI) in achieving its 4 per cent inflation target.

While the RBI maintained the lending rate steady at 6.50 per cent earlier this month for the seventh consecutive meeting, market expectations for rate cuts are centred on early 2025, with Morgan Stanley ruling out any cuts for the current fiscal year.

India faces the imperative of interest rate reductions to support its economy in reaching its growth potential. However, interviews with two external members of the South Asian nation's monetary policy committee suggest a division regarding the timing of such cuts.

(With Reuters inputs)