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, traders said on Tuesday.

This demand has pushed the USD/INR cash swap rate to levels below those implied by the rupee and dollar overnight rates.

For instance, the USD/INR cash swap on Monday declined to 0.36 paisa, implying an overnight rupee funding rate of 5.40%. That compares to the call rate of near to 6%. On Tuesday, the swap rate was at 0.42 paisa.

The cash dollar crunch this week is likely to be temporary and should improve once the month is over, a swap trader at a state-run bank said.

The demand for dollars towards the end of the month can be skewed by the USD/INR forwards roll-overs and corporate dollar outflows.

The USD/INR spot was marginally higher at 81.7075, underperforming its Asian peers by a wide margin. The offshore Chinese yuan and the Korean won rallied more than 1%.

Another trader said that a build-up in bets that the rupee will gain against the dollar is possibly contributing to the fall in the cash swap rate.

The outlook on the rupee has improved due to expectations that the dollar index and U.S. yields had likely peaked. Further, there has been a turnaround in foreign equity inflows, pushing Indian equities to record highs.

The trader also noted that the Reserve Bank of India has not been required to intervene to protect the rupee as it did last month.

The decline in the cash swap rate has led to a drop in forward premiums. The 1-year USD/INR forward implied yield on Monday fell to levels last seen more than a decade back. (Reporting by Nimesh Vora; Editing by Savio D'Souza)