Mumbai: The rupee has a one-in-three chance of weakening to around 67 per dollar by March 2016, assuming the global turbulence continues and local policy-setting remains unchanged, Crisil Research, an arm of credit-rating agency Crisil Ltd, said on Wednesday.

But the agency’s best-case scenario is for the rupee to appreciate from the current levels to around 64 per dollar by March 2016, helped by better macroeconomic fundamentals like lower fiscal and current account deficits (CAD) and falling inflation.

“We assign a two-in-three chance to this event. And this would be accompanied by some more credible policy measures to improve ease of doing business, which can improve investor appetite," Crisil Research said.

The Indian currency ended at 66.14 on Wednesday. It has weakened 4.70% so far this year. However, the weakness has exaggerated after China devalued its currency earlier this month.

Crisil Research pointed out that the rupee has dropped by as much as 3.7% since the yuan devaluation on 11 August, raising memories of 2013 when the rupee fell to an all-time low of 68.85, weakening 24% in four months.

“However, the current scenario is different to what we saw in 2013. While our external vulnerability has declined, the frequency of global shocks has increased," Crisil Research said, adding that the US Federal Reserve’s interest rate action could be the next big mover for the rupee.

Crisil Research said that its parent Standard & Poor’s (S&P) forecast of current account deficit (CAD) of 1.5% of GDP for fiscal 2016 for India is one of the lowest among major emerging countries, helped by lower commodity prices—especially oil.

“Commodity exporting countries such as Brazil and South Africa, on the other hand, continue to see high levels of CAD. In addition, short-term external debt as a percentage of total external debt remains benign in India (at 19% in 2014)," the agency said, adding that India is better placed compared to other emerging countries as inflation is on a downward trend while growth is picking up.

“All this is reflected in relatively lower depreciation of India’s currency, this year, compared to peers. The rupee has depreciated 9% year-on-year (as of 25 August 2015), while the Brazilian real has fallen 58%, Malaysian ringgit 32.6%, and the South African rand 23%," the agency said.

However, if the US Federal Reserve hikes interest rates in September, as predicted by S&P, the rupee could come under pressure as global institutional investors could pull money out of emerging markets, strengthening the dollar.

“Overall, the frequency of shocks has increased in recent months and though India is better placed than other emerging economies, the rupee has also started losing ground. Net inflows from foreign institutional investors between April and July were a paltry $0.8 billion compared with $17 billion in the same period last year. Indeed, May and June had seen net outflows of $2.2 billion and $0.2 billion, respectively, and so far even August has seen a net outflow of $1.4 billion," Crisil Research said.

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