Indian government bonds edged higher on Thursday, supported by reports that New Delhi may offer tax relief to foreign investors, though compounding currency and inflation risks kept investors wary of a hawkish central bank policy on Friday.The benchmark 6.48% 2035 bond yield fell 3 basis points to end at 7.9931%.Reuters and ‌local media reported ⁠that ⁠the government is considering scrapping the 12.5% capital gains tax on overseas investors and the 20% withholding tax on interest earned by foreign investors in government securities.Tax-cut hopes lift Indian bonds but RBI hike fears loomReuters and ‌local media reported ⁠that ⁠the government is considering scrapping the 12.5% capital gains tax on overseas investors and the 20% withholding ​tax on interest earned by foreign investors in government securities.The measures could improve the ​appeal of Indian debt ahead of Bloomberg's June review for inclusion in its Global Aggregate Index.While about 80% of economists in a Reuters poll expect the RBI ​to hold rates on Friday, some traders are ⁠positioning for ‌a hike to shore up the rupee."The RBI could stay ​on hold ​this week, but the risks of a rate hike are ⁠rising," said Sok Yin Yong, fixed-income analyst, Asia, at Julius ​Baer, adding that inflation could climb further from April's 3.5% ​after multiple fuel price hikes by state-run retailers in May.Crude prices have risen 35% since the Iran war began in February, intensifying pressure on Indian assets given the country imports about 90% of its oil needs.Over the same period, the rupee has hit record lows and the 10-year bond yield has ‌risen nearly 35 basis points.A rate hike could help preserve India's yield premium over U.S. Treasuries, draw foreign debt inflows and support the rupee, traders said. Even ⁠with a 25-basis-point increase, the 10-year sovereign yield is unlikely to breach 7.15%, they said. Globally, a ceasefire agreement between Israel and Lebanon boosted hopes for a broader deal to end the U.S.-Israeli war on Iran and eased oil and U.S. Treasury yields.RATESIndia's overnight indexed swap rates were mixed as policy concerns weighed.The one-year swap was up 1 bp at 6.1150%, and the two-year rate was down 1 bp at 6.33%. The five-year rate was little changed at 6.6275%.