The reckoning

ON THE morning of August 17th most of India’s economic policymakers gathered in the prime minister’s house in Delhi. They were there to launch an official economic history of 1981-97, a period which included the balance-of-payments crisis of 1991. The mood was tense. India, said Manmohan Singh, the prime minister, faced “very difficult circumstances”. “Does history repeat itself?” asked Duvvuri Subbarao, the outgoing head of the Reserve Bank of India (RBI). “As if we learn nothing from one crisis to another?”

The day before Indian financial markets had had their rockiest session for many years. The rupee sank and stockmarkets tumbled. Money-market rates rose. The shares of banks thought to be either full of bad debts or short of deposit funding fell sharply. The sell-off had been made worse by new capital controls introduced on August 14th in response to incipient signs of capital flight. They reduce the amount Indian residents and firms can take out of the country. Foreign investors took fright, fearful that India might freeze their funds too, much as Malaysia did during its crisis in 1998.