The rupee may come under pressure as emerging market currencies face headwinds due to events surrounding Evergrande in China, a report from economists at HDFC Bank said on Wednesday.
The smaller-than-expected correction in Chinese stocks is a short-term respite for markets, according to a report from a team led by Abheek Barua, adding that they remain cautious.
We remain cautious of what turns into a broader risk scenario, which could mean increased pressure on emerging market currencies, including the INR (rupee), as the dollar remains long. -he declares.
If the worst-case scenario of the Chinese government taking a hands-off approach to the deal unfolds, the rupee may see volatilities and may depreciate to 75 against the dollar, the report added.
Evergrande, China’s largest real estate player, is under financial pressure. He has more than $ 300 billion in liabilities and has an interest payment of $ 83.5 million on a bond due Thursday and $ 47.5 million next week. The world is watching events closely, especially to see if the company is delivering on its commitments, and some observers compare it to the Lehman Brothers case in the United States that led to the 2008 global financial crisis.
For now, the uncertainty surrounding Evergrande’s situation could keep the market on its toes (positive for the dollar), which, with the US Fed’s policy move later today, could mean the pair USD / INR remains under pressure, Barua wrote, adding that he expects the rupee to trade in a range of 73.65 to 74 per dollar on Wednesday.
The expectation of a large part of the market is for the government to step in and offer a bailout / restructuring of the Evergrande group, but investors are worried about whether China will move away from the too big to fail narrative as ‘it is trying to control monopoly behavior, just like the position it has taken in the tech industry.
Recent regulation and crackdown by Chinese authorities in several sectors, including technology and education, has created uncertainty around the government’s response to Evergrande, according to the report.
If Evergrande is allowed to default, the market could witness a sell-off with significant contagion risks for global financial markets, he warned.
So far, regulators have approved a proposal by Evergrande to renegotiate payment terms with banks and other creditors, and the Chinese central bank has also injected 120 billion yuan ($ 18.6 billion) into the banking system. via reverse repurchase agreements on Wednesday, he said.
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