AVR USART Not Receiving

I have connected my AVR USART to file stream so as to make it easy to send formatted strings on ATmega8

From the AVR, I can send(TX) just fine. However, I am not receiving anything. Can't put my hand on it but it looks like I'm overlooking something very basic.

uart.c

#define FOSC 8000000
#define BAUD_RATE 38400
#define UBRR_VALUE (uint16_t)(FOSC/16/BAUD_RATE-1)

#include "uart.h"

FILE uart0_str = FDEV_SETUP_STREAM(UARTSendByte, UARTReceiveByte, _FDEV_SETUP_RW);


void UART_INIT(void)
{
    UBRRH = (uint8_t)(UBRR_VALUE>>8); //set UBRR register
    UBRRL = (uint8_t)UBRR_VALUE;
    UCSRC = (1<<URSEL) | (1<<UCSZ1) | (1<<UCSZ0) | (1<<USBS);//set frame format: asynchronous,8data,2 stop,no parity
    UCSRB = (1<<TXEN) | (1<<RXEN) ;
    _delay_ms(10);

    stdin=&uart0_str;
    stdout=&uart0_str;
}

void UART_WRITE_STRING(char* str)
{
    printf("%s",str);

}

int UARTSendByte(char u8data, FILE *stream)
{
    if(u8data=='\n')
    {
        UARTSendByte('\r',stream);
    }
    while(!(UCSRA&(1<<UDRE))){};
    UDR = u8data;
    return 0;
}

int UARTReceiveByte(FILE *stream)
{
    printf("hello1\r");
    UART_WRITE_STRING("hello1\r");
    uint8_t data;
    // Wait for byte to be received
    while(!(UCSRA&(1<<RXC))){};
    data=UDR;
    //echo input data
    UARTSendByte(data,stream);
    // Return received data
    return data;
}

main.c

#include "uart.h"
#include "twi.h"
#include "ds1307.h"

void bootCode(void);


int main (void)
{
    DDRC = 0x01; //set PC0 as output
    PORTC = 0x01; //turn on PC0
    DDRD = 0x02; //PD0 = RXD = INPUT,PD1 = TXD = OUTPUT

    UART_INIT(); //initialize UART
    TWI_INIT(); //initialize TWI

    UART_WRITE_STRING("ANKIT.*****@GMAIL.COM\r");
    UART_WRITE_STRING("JUNE 16, 2014\r");
    UART_WRITE_STRING("####################################\r\r\r\r");

    while(1)
    {

    };
}

When I run this, I get the printed strings, but there is no response whatsoever to the text I input.

when I send the text, ideally it should be echoed back on the terminal + I should also get the "hello1" strings hard-coded in the UARTReceiveByte function

UPDATE

While looking at my code I had another thought.

Since I am binding my USART input and output to the standard file streams => if in order to TX from AVR I need to use "printf". By the same logic, the data entered from my PC terminal will not be valid unless there is a "scanf" call in my code.

So as a test, I added a line in my main.c before the infinite loop

unit8_t d;
scanf("%c",&d);

Now when I enter something at the terminal i do get "hello1" 2 times printed on the terminal (as coded in the UARTReceiveByte function).

As a side question, while I am using FILE streams, can I also use USART interrupts?