• Fed's liquidity injection operations and confidence-boosting commentary diminish US dollar's safe-haven demand.
• Upside risks to RBI's inflation forecast and a potential rate hike in April as India assesses state-run lenders.
• All eyes are on upcoming US PCE data and global banking development.

The USD/INR is struggling to decline further, despite the broad-based US Dollar weakness stemming from recent positive banking developments and the Federal Reserve (Fed) signaling a pause. The pair is currently trading just below the 82.40 mark.

Recapping recent developments in the US banking sector, the consecutive failures of some US regional banks have prompted the Fed to adopt a slightly dovish stance in their last FOMC meeting. As a result, they signaled a pause after implementing a 25 basis point (bps) rate hike.

The Fed's ongoing liquidity injection operations and a strong willingness to support and tackle any surge in banking concerns have diminished the US Dollar's demand as a safe haven. 

Last week, confidence-boosting commentary from the US Treasury Department and Fed members helped investors regain confidence in their risk appetite. Fed voter Kashkari emphasized that the US banking system is resilient and sound, but reducing stress would take time. Other Fed officials have adopted a similar tone, prioritizing inflation and boosting confidence in the underlying banking system.

Moving on to the Reserve Bank of India (RBI), there are upside risks to the RBI's January-March inflation forecast, and firm core prints are likely to result in a majority of the Monetary Policy Committee  (MPC) members leaning towards a 25 bps hike in April. Afterward, a pause in rates could be expected to allow the lagged impact of hikes to filter through.

In response to recent developments in the global banking crisis, India's Finance Minister Nirmala Sitharaman has initiated a step to assess the underlying fundamentals of state-run lenders and public sector banks.

The US economic calendar will feature the final print of Gross Domestic Product (GDP) data and Unemployment Claims on Tuesday. Subsequently, the focus will shift to US Personal Consumption Expenditure (PCE) on Friday.

Levels to watch