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The Indian rupee was trading higher against the U.S. dollar on Monday, helped by likely position building and lack of cash dollar demand, traders said.

The rupee was at 82.5750 per U.S. dollar by 10:50 a.m. IST, compared with 82.72 in the previous session.

The U.S. holiday means there is no cash dollar demand and then our (dollar) sell-side order book is a bit active, said a spot trader at a private bank.

It was possible that interbank is building new short positions on the USD/INR, with the stop-loss pegged above the 82.90-83.00 level, he said.

He, however, cautioned against reading much into the price action, adding that the currency pair basically lacked any direction.

The rupee, this week, will take cues from the response of the dollar and Treasury yields to a string of U.S. data.

The data on manufacturing, services and employment will provide cues on the extent of the U.S. economic slowdown, moulding expectations on the Federal Reserve's rate outlook.

The markets are beginning 2023 on expectations that the Fed will further slow down its pace of rate hikes to 25 basis points when it meets next in February and start cutting rates later in the year in response to a slowing economy.

But these expectations are at odds with the position of Fed officials, who have indicated that rates are likely to remain at 5%, and possibly higher, through the year.

"Such a divergence may lead the forex volatility higher at least in the coming two quarters," said Arnob Biswas, head of FX research at SMC Global Securities.

Indian equities began the year on a positive note after last year's outperformance. The USD/INR forward premiums extended their recent slide, with the 1-year implied yield falling to near 2%.