MUMBAI: The rupee can come under pressure as emerging market currencies face headwinds because of the events surrounding Evergrande in China, a report by HDFC Bank economists said on Wednesday.
The lesser than expected correction in Chinese shares is a short term breather for the markets, the report by a team led by Abheek Barua said, adding they continue to remain cautious.
"We remain cautious over this turning into a broader risk-off scenario, which could mean increased pressure on EM currencies, including the INR (rupee), while the dollar remains bid," it said.
If the worst-case scenario of the Chinese government taking a hands-off approach in the case playing out, the rupee can see volatilities and can depreciate to 75 against the dollar, the report added.
Evergrande, China's largest realty player, is under financial stress. It has over USD 300 billion in liabilities and has a USD 83.5 million interest payment on a bond due on Thursday and another USD 47.5 million next week.
The world is closely watching the events, particularly to see if the company honours its commitments and some watchers are comparing it with Lehman Brothers' case in the US that led to the 2008 global financial crisis.
"For now, the uncertainty around the Evergrande situation could keep the market on its toes (positive for dollar) which along with the US Fed policy decision later today could mean the USD/INR pair remains under pressure," Barua wrote, adding that he expects the rupee to trade in a range of 73.65-74 to the dollar on Wednesday.
The expectation of a broad section of the market is for the government to step in and offer a bailout/ restructure the Evergrande group, but investors are worried whether China will move away from the "too big to fail" narrative, as it tries to rein in monopoly behaviour, much like the stance it has taken in the tech sector.
The recent regulations and clampdown by Chinese authorities in several sectors, including tech and education, has created uncertainty around the government's response to Evergrande, as per the report.
If Evergrande is allowed to default, the market could see a massive sell-off with significant contagion risks for global financial markets, it warned.
So far, the regulators have approved an Evergrande proposal to renegotiate payment deadlines with banks and other creditors and China's central bank also injected 120 billion yuan (USD 18.6 billion) into the banking system through reverse repurchase agreements on Wednesday, it said.