The rupee closed largely unchanged against the US currency in thin volume on Monday as the New Year holiday in several markets made for lacklustre trade.
In the first trading day of the year, the rupee ended at 82.7375 per dollar, against its previous close of 82.72.
It touched a near three-week high of 82.5675 early in the day, which dealers said was likely due to short USD/INR positions being built.
Overall, though, the flows are "too little" and that's kept the rupee from finding any direction, said a trader with a private bank. They expect some cash dollar demand to return on Tuesday when the U.S. market resumes trade.
However, participants agreed that the rupee was likely to find a firm direction in the third week of January, with positions being added closer to the Union Budget due on February 01.
The rupee should move between 82.40-83 in the near-term and high volatility can be expected ahead of the budget, Dilip Parmar, research analyst at HDFC Securities, said in a note.
Meanwhile, USD/INR forward premiums slipped, with the 1-year implied yield falling to below 2% as public sector banks were bid shy, traders said.
In the broader markets, holidays in most of Asia and developed economies kept things quiet, but a flurry of US data this week could provide some cues over the period.
US manufacturing, services and employment data due later this week will be watched to gauge the extent of an economic slowdown there and how it will shape the Federal Reserve's monetary policy path going forward.
Markets are expecting the Fed to soften its stance, with even some rate cuts being priced in for the second half of this year.
"We may see some correction in the dollar in 2023 ... and the rupee is likely to trade with an appreciating bias in the range of 81-83 till March," Aditi Gupta, an economist at Bank of Baroda said.