Chinese risk to Rupee not over yet

Mumbai: China Evergrande Group’s debt crisis could lead to the rupee depreciating to the 75 level against the dollar in the worst-case scenario of the Chinese government adopting a hands-off approach, according to a report by economists of HDFC Bank.

To calm the market jitters, Evergrande’s onshore property unit agreed to settle interest payments on a domestic bond on Wednesday, while the Chinese central bank injected cash into the banking system, soothing fears of imminent contagion from the debt-laden property developer.

The Chinese central bank, the People’s Bank of China, boosted its gross injection of short-term cash to the tune of $18.6 billion into the banking system through reverse repurchase agreements, resulting in a net injection of 13.92 billion. As a result, after a two-day holiday, Chinese shares fell by less than expected.

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.

Market sentiments have been rattled by the potential contagion from a liquidity crisis at Evergrande, the largest property company in China. The US Dollar Index (DXY), along with other safe haven assets, have gained while equities, metal prices and the yuan have all come under pressure.

Evergrande has $ 83.5 mn interest payment for its March 2022 bond due on September 23 and $ 47.5 mn interest payment for its March 2024 bond due on September 29.

“While in the baseline, the Chinese government could step-in and bailout Evergrande–as expected by a wide section of the market – the risk of a more hands-off approach adopted by the Chinese authorities continues to loom (worst case scenario) which could lead to a significant increase in risk aversion in the system. In the latter case, the USD/INR pair is vulnerable to sharp volatile movements and a possible move towards 75.0 levels could be seen,” said the report.