It is Independence Day in India, a holiday during which the national flag is raised on everything from the ramparts of Delhi’s monuments to the bonnets of Mumbai’s battered black cabs

The Indian rupee

Dependence day

Aug 15th 2013, 8:23 by P.F. | MUMBAI

IT IS Independence Day in India, a holiday during which the national flag is raised on everything from the ramparts of Delhi’s monuments to the bonnets of Mumbai’s battered black cabs. This year it may be remembered for India’s enslavement to global capital markets. Yesterday evening, August 14th, after most people had left work, the central bank imposed new capital controls to try to stem a balance-of-payments crisis. Psychologically the manoeuvre feels like a step back in time, to India’s pre-reform era of the 1980s, when Indians were fenced off from the rest of the world by their government, entrepreneurs had to beg pompous officials for foreign exchange and the rich had to ask their servants to buy malt whiskey from the black market.

The changes are not as serious as that, but they will hurt the rich. They will now be able to ship a maximum of $75,000 out of the country each year, from a previous peak of $200,000. Firms will only be allowed to make investments abroad equivalent to their capital, from a previous limit of four times. For the wealthy, paying for fees at English schools and Ivy League universities will be harder, as will buying a bolt-hole in Singapore, or holding lavish weddings in Mauritius. Faced with grim conditions at home many Indian firms are keen to follow the lead of giant companies such as Tata Sons and invest more abroad, as we explained in an article last week. That will now be much harder.

The central bank may have been worried about capital flight­. Local firms and rich people have not yet started shipping money out of the country but many must have thought about it­—after all, foreign investors are selling. To boost the rupee in the past two months the authorities have already pushed up market interest rates, restricted imports of gold and some luxury goods and made it easier to borrow abroad. The mood on the ground in India is more self-flagellant than the baddies were in “The Da Vinci Code”.

Is all this an overreaction? The benign view is that Indians are mistaking a global slump in emerging markets for a rejection of their country by global investors. In the past three months India has not performed notably worse than most other developing economies in terms of its currency, short-term interest rate rises or perceived sovereign risk. Plenty of other places have politics as messy as India’s. Indonesia also has a tricky election next year. Brazil and Turkey have seen civil unrest this year. On most measures the rupee is cheap.

But India has two special vulnerabilities. One is that it is not well positioned to cope with a buyers’ strike if markets dry up. India’s financing requirements, as measured by its current-account deficit and the external debt it needs to roll over in the next 12 months, amount to about $250 billion. Its foreign-currency reserves are only just able to cover this. Only South Africa and Turkey are in such a weak position, and plenty of places are much better prepared—Brazil’s reserves are double its gross financing needs.

The second peculiarity is the strange collapse in confidence in India’s long-term trajectory. In his speech to the nation yesterday, even India’s president, Pranab Mukherjee, a wily old operator whose disastrous stint as finance minister from 2009 to 2012 helped fuel the present crisis, noted “widespread cynicism and disillusionment” with India’s institutions. That matters for foreign firms and equity investors who have put money in India and are mainly interested in its ability to recover and grow quickly over the next decade, rather than in its short-term market gyrations. Their total investments amount to over 25% of GDP; if they start jumping ship India will be in deep trouble.

The rich will be despondent today—and, in time-honoured tradition the craftiest will be thinking up wheezes to get round the rules. But on the streets today most Indians will be celebrating. In a way that is the heart of the matter. India has become a place with a sophisticated elite and an economy that relies on foreign capital, but with a population and political class that isn’t much interested in the policies necessary to attract and retain it.