YESTERDAY we blogged about India’s worrying imposition of new capital controls, announced on the evening of August 14th to stop cash flowing out of the country and stem the decline of the rupee. I’ve just had a briefing from local officials about the policy. The local media has been uncharacteristically quiet about the measures, but foreign investors and well-off Indians should be watching closely. Our colleagues at the Financial Times are. They published a well-judged leader in today’s paper. India’s financial markets had have had another tough day. The main equity index fell 4% on Friday, August 16th, making it the worst-performing big bourse worldwide. The rupee reached a new low of 61.7 to the dollar. Indian money market rates leapt again, indicating stress in the system. And the Indian banks most reliant on wholesale funding got clobbered. Yes Bank’s stock price sank by more than 10% during the day. It has halved since May.

To recap, on the 14th the central bank clamped down on Indians’ ability to take money out of the country in two ways. The limit on personal remittances has been cut to $75,000 per year, from $200,000 per year. And companies are now barred from spending more than their own book value on direct investments abroad, unless they have specific approval from the central bank. Previously they could spend up to four times their own net worth. Both changes reverse the gradual liberalisation of India’s balance of payments over the last decade.

The restriction on personal outflows is, apparently, to deal with incipient signs of capital flight by India’s rich. Brokers, bankers and assorted hustlers, mainly based offshore, have been rushing to offer wealthy Indians cash extraction services. Marketing emails from them have been circulating widely. The pitch is primitive: take your dough out now, convert it into a hard currency, wait for the rupee to fall to 70 against the dollar, then bring it back into the country and convert it back to rupees at the more favourable rate. Outbound personal remittances by Indians have been small historically—perhaps $1bn a year, a drop in the ocean given India’s current-account deficit of $70-80 billion. But the Indian authorities’ aim is to crack down on these schemes before they cause a much bigger speculative outflow and a self-fulfilling panic.

The second measure, the prevention of firms investing much abroad, is more nuanced. Such outflows are already a significant drain on the balance of payments. In the year to March 2013 gross outbound direct investments by Indian firms were $13 billion (some Indian firms sold foreign assets and brought the money home, so the net figure was lower, at $7 billion). Under the new system most firms will need official permission for deals. The aim, apparently, is not to restrict “legitimate” activity, whatever that means, but to put “grit into the wheels”. The new red tape involved will slow down the pace at which deals happen and probably lead some firms to postpone their plans, thus lowering short term demand for dollars. Probably, the authorities want to do some intimidation too. Any dodgy companies that were hoping to speculate on the rupee, for example by doing takeovers of specially created cash-rich shell companies abroad, will now think twice.

Are these measures sensible? They have a narrow logic to them. But by stepping into the arena of capital controls, India’s authorities have planted a seed of doubt: might India “do a Malaysia” if things get a lot worse? Malaysia famously stopped foreign investors from taking their money out of the country during a crisis in 1998. Indian officials regard this suggestion as absurd. But investors do not. Your correspondent happened to interview the head of currency trading for a big global bank in Singapore on June 19th, before India’s difficulties began in earnest. The offshore market for rupee trading has exploded in size in the past year or so. It probably accounts for more than half of all rupee trading volumes. His view was that speculators and investors traded outside of India’s borders because they were that scared India might freeze funds inside the country. Right now, these people will not be reassured.

To try to limit the damage, India’s finance ministry and central bank need to make clear in public that they have no intention of tightening capital controls on foreign investors, as opposed to unlucky locals. Beyond that, they will try to find more tricks up their sleeve. They could raise an IMF loan to augment India’s $270 billion of foreign reserves and make clear it has ample firepower to cope with a freezing-up of markets. (India’s total financing needs are about $250 billion over the next year, measured by its current account deficit and the debt it needs to roll-over.) But that seems to be off the table. With a general election due by next year the politicians do not want the stigma involved. Another option is launching a big sovereign bond denominated in dollars to achieve the same end. But officials are rightly worried that this could backfire­. The government has long eschewed borrowing in foreign currency, precisely because it links its solvency to volatile currency markets.

That leaves two main alternatives. The first is government fiat to change the mix of exports and imports for the better. Raising regulated prices on imported fuel and taxes on imported gold would lower demand. Eliminating the present ban on iron-ore exports from India, which was imposed after multiple corruption scandals, could bring in perhaps $10 billion of foreign earnings. These moves are sensible but controversial and may take time. The second option for the authorities is to sit sight, do nothing, and hope that the currency responds to the measures taken so far. For now that is India’s preferred course of action. Fingers crossed.