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Cash dollars demand may witness an upside this week on the back of month-end flows and expectations of a rise in the Indian rupee. On Tuesday, the Indian currency failed to take the advantage of broadly positive Asian cues and traded in a narrow range. The local unit closed slightly weaker against the US currency.

As per a Reuters report, traders revealed that month-end flows and speculative positions betting on a rise in the Indian rupee are likely responsible for the increase in demand for cash dollars this week. Further, this demand has pushed the USD/INR cash swap rate to levels below those implied by the rupee and dollar overnight rates.

On Monday, the USD/INR cash swap plunged 0.36 paisa --- resulting in an overnight rupee funding rate of 5.40% --- which is compared to the call rate of nearly 6%. On November 29, the swap rate was around 0.42 paise.

A swap trader at a state-run bank told Reuters that the cash dollar crunch this week is likely to be temporary and should improve once the month is over. Also, the demand for dollars towards the end of the month can be skewed by the USD/INR forwards roll-overs and corporate dollar outflows.

On Tuesday, the rupee closed at 81.72 against the US dollar compared to the previous day's print of 81.67 per dollar.

Meanwhile, the rupee forward premiums edged higher from multi-year lows. The 1-year implied yield rose three basis points to come to around 2%.

Sriram Iyer, Senior Research Analyst at Reliance Securities said, "The Indian Rupee (SPOT) ended slightly weaker against the U.S. dollar on Tuesday, in another quiet session where the local unit traded in the small trading band."

Meanwhile, the offshore Chinese yuan surged over 1% amid hopes of a potential easing in China's strict pandemic restrictions but did not have an impact on the rupee from an intraday perspective. Also, in the overseas markets, the dollar index eased as safe-haven demand triggered by widespread Covid protests in China started to ease.

"The fall in the dollar index also had little impact on the markets," Iyer added.

According to Iyer, traders will continue to assess the trajectory of Federal Reserve interest rate hikes when Fed Chair Powell speaks this week.

On Wednesday, on the economic front, India's September-quarter GDP data is due and will be watched closely. However, the key trigger for the rupee could come from the Fed Chair's speech on Wednesday night.

 

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