A Run on the Rupee?

I have covered gold and India in several posts (Scroll down), mainly focusing on the trade deficit fueled by gold imports.
This is an important equation. If domestic investors are dumping their currency to buy gold, they are weakening their currency on the global market. When it reaches the level of Indian consumption/investment and it's coupled with a weak economy, it can turn into a self-fulfilling prophecy of currency "collapse," i.e. the currency could suffer a mini-crisis and decline sharply until the gold price rises enough to slow imports. The Indian government would rather have gold imports decline gradually, rather than abruptly through a financial or economic crisis.
It seems the government's efforts have failed. To be clear, gold was merely a symptom:
In the end, India's problem is not really gold. It is about weakness in the political-economy. They are dealing with a symptom, rather than a cause. The greatest proof of this is China. Why has Chinese gold demand surpassed that of Indians? China is India's mirror case: the government promotes physical ownership of gold. Physical gold products are on sale at state-owned banks, alongside brochures for precious metals accounts.
It doesn't matter how the point is arrived at when considering the next step. The Indian government is signaling that it is losing control of the currency:
There is "no question" of India going back to an economic crisis experienced in 1991, as its rupee currency is now linked to the market and foreign exchange reserves are adequate, Prime Minister Manmohan Singh said on Saturday.
The denial is proof of concern. This only makes gold more attractive to Indians who will now add currency devaluation to their list of fears. As I wrote previously, Indian gold demand is going to slow because of a financial crisis.

Here is the Bombay Stock Exchange, down about more than 1% after falling 4% on Friday:

India isn't alone in falling today, Indonesia is down as well. This may be the incipient U.S. dollar rally finally taking form.

H/T: Mish. See more of the story at: Official Denials Run Rampant in India; "No Question" of Economic Crisis; Rupee Plunges to Record Low; Gold Coin Imports Banned

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