The onset of 2019 has brought a different set of challenges for the global risk environment. While on one side, benign rates offer significant tailwind for market risk-on sentiment, on the other side, the possibility of significant growth scare has created headwinds for the sentiment. Even as market participants still grapple with this dilemma, systemic central banks, most notably the European Central Bank (ECB) and the US Fed have opened up their cards quite unexpectedly. First, let's look at how the Fed managed to surprise the markets. While the expectation was for a downward shift of the median of the dot plot from two hikes in 2019 to one, the actual outcome was for a more cheerful pause for the entire 2019 with as many as nine incremental Federal Open Market Committee (FOMC) members changing their view. Second, the tapering of the reduction in the balance sheet size of the Fed (in other words the tapering of the taper) starts in May, much earlier than expected. Third, the FOMC did not meaningfully reduce the median neutral rate forecast which means that for 2019, policy stance has effectively moved from being restrictive to one of easing. The FOMC did maintain one hike for 2020 but as the visibility for such long term is fairly blurred, for all practical purposes it would seem that the Fed has effectively signalled an end of the tightening cycle for now. We do remain puzzled as to the reason the FOMC decided to sacrifice its policy flexibility so early in the year though we acknowledge the role played by falling inflation expectations, rising global uncertainties and tightening financial conditions. The template of the ECB too seemed similar with a downgrade in both growth and inflation forecasts, commitment to keep interest rates unchanged through the current calendar year and commencing a series of targeted longer-term refinancing operations (TLTRO- season 3) ending in March 2021. The infamous central bank policy “put” seems to have resurfaced with rigorous vigour and this has the ability to transform asset class performances and the reaction function of market participants. The bond markets have rejoiced with a steep fall in the benchmark US 10-year yield, with the yield curve inverting on 3-month-10-year while the standard 2s-10s metric threatening to invert anytime. Furious debates will soon gather momentum as to whether this signals recessionary forces at play. We are on the side that believe that post global financial crisis (GFC), due to incessant central bank buying, such valuable signals from the yield curve have become meaningless. Nevertheless, it will be appropriate to say that US rates are likely to remain low albeit with a fair dose of volatility. The strength in the dollar index that we witnessed over the last two years was a reflection of widening growth and monetary policy differential with the rest of the world. Now, these differentials have started to narrow in light of expectations of the growth slowdown in the US and the substantial policy pivot by the Fed. It does seem that it is now time to fade the “strong dollar” trade and revive the “lower for longer” paradigm. But this mood remained in place all of one day as the collapse in the German manufacturing index on the very next day driving a massive weakness in the Euro and a decline in German benchmark bond yields to negative territory, possibly restoring the relative differential in the strength of the dollar versus G3 currencies (USD, Euro, pound sterling). The central bank policies may well herald a renewed phase of competitive currency depreciation. The dollar performance will not be uniform and will be varied against developed markets (DMs) as compared to emerging markets (EMs). Broadly speaking, a consolidating (lack of vigour) dollar and lower US rates are positive for EM assets across the board. However, high yielding EMs such as India and Indonesia are likely to fare better as compared to other Asian exporter who would not be out of the woods until the ongoing “trade war” issues are sorted and their external demand outlook meaningfully bottoms out. On the other hand, if the ever threatening oil prices continue to move up then the fortunes of the Asian high yielders could reverse. It doesn’t take long for the EM risk-on trade to reach Indian shores. In fact, with almost all factors falling in place for the near term, India seems to be right at the center of this EM largess. A benign inflationary trend, partial consolidation in the fiscal deficit, hopes of a majority stable government and a thaw in the cross border geopolitical climate are all aiding the local currency in being the best performer. We have already received capital flows to the tune of $6 billion cumulatively for the January-March quarter so far. With the recent move by the FOMC, this seems set to continue. Back home, the Reserve Bank of India (RBI) has also seemingly put the spotlight clearly on tackling the liquidity environment and the need to attract foreign capital. The recently introduced voluntary retention route for bond market instruments, the introduction of long term forex swaps to lower systemic hedging costs, liberalising external commercial borrowing norms to facilitate overseas borrowing for corporates at large will all serve to support capital flows and reduce vulnerabilities on our external account. The recent positive surprise on the trade deficit and sustained capital flows have led us to revise lower the balance of payment deficit expected for FY19 even as we get more optimistic about the FY20 balance of payments surplus. Central government borrowing fears, apprehensions of the spike in oil prices and a reduced prospect of RBI open market operations (OMO) purchases have all resulted in Indian bonds unable to rejoice despite benign global rates, dovish tilt in our own monetary policy, slowing growth momentum and benign inflation. Bond yields in India are likely to continue to (bull) steepen militating against the flattening trend evident globally. In summary, with systemic central banks exercising their “put” through their monetary policies, the balance of risk is shifting favorably for EM risk sentiment and capital flows, albeit with the risk of a sharp global slowdown and its attended consequences. Within that, it surely looks as if India is likely to be a big beneficiary. B Prasanna is head of global markets at ICICI Bank.