USD/INR hovers above 83.20, expects challenge as a RBI swap deal is set to mature

• USD/INR could face trouble as RBI $5B swap deal is set to mature on October 23.
• Traders are concerned about the availability of US Dollars in the Indian banking system.
• Greenback encounters challenges due to the dovish remarks from several Fed officials.

USD/INR trades higher above 83.20 during the Asian session on Tuesday. The Indian Rupee (INR) may face challenges as a $5 billion RBI swap deal is set to mature on October 23. This maturity could lead to a dollar shortage in the market as the RBI intends to buy these dollars for its reserves rather than extending the deal.

This situation has resulted in a 10 basis points drop in premiums over one year, with the cash spot trading at -0.05 recently. This dynamic may be influencing the increased buying of dollars in the market. Moreover, traders have expressed concerns about the availability of dollars in the Indian banking system.

The Indian rupee declined to 83.28 against the US dollar on Monday, reaching its lowest level in one year against the greenback.

Asian currencies displayed mixed trading as the United States intensified efforts to prevent the Israel-Hamas conflict from escalating into a regional crisis. President Joe Biden is scheduled to visit Israel on Wednesday, aiming to signify US solidarity with its closest Middle East ally and avert the widening of the conflict.

Safe-haven Greenback tends to attract demand during periods of heightened uncertainty and geopolitical risks.

The US Dollar Index (DXY) efforts to recover from recent losses, trades higher around 106.30. However, the US Dollar (USD) has been under downward pressure, largely influenced by dovish comments from multiple Federal Reserve officials.

These comments signal that no further interest rate hikes are anticipated for the remainder of 2023, emphasizing a cautious approach by the central bank and a reluctance to tighten monetary policy in the current economic climate.

Federal Reserve Bank of Philadelphia President Patrick Harker echoed this sentiment on Monday, suggesting that the central bank should avoid introducing new economic pressures by increasing borrowing costs. Harker emphasized the view that unless there is a significant shift in the data, the Fed should maintain interest rates at their current levels.

While the recovery in US Treasury yields from recent losses could lend support to the US Dollar, with the 10-year US Treasury bond yield standing at 4.75%, by the press time.

Market participants will likely keep a close eye on the US Retail Sales data, and the Fed Beige Book report will also be a focal point on Tuesday.