Investors have priced in a pickup in India’s economic growth and corporate earnings, but there needs to be a sustained policy implementation and calm global financial markets for these to be realised, said, chief economic adviser, Allianz , which had €1,900 billion under management at the end of 2016. In an e-mail interview with The Economic Times, El-Erian , based in Newport beach, California, said most indicators point towards the Modi government’s continued commitment towards policies that can boost India’s economic potential. Edited excerpts:One’s view on Indian markets is a function, to a large extent, of prospects for pro-growth policies. Encouraged by the measures taken so far, investors have priced in a sustained pick up in both economic growth and corporate earnings, the realisation of which would require sustained policy implementation at home and relative financial calm internationally.Most indicators suggest that the government remains committed to continuing its policy approach aimed at unleashing India’s significant economic potential. This is important as, in this phase of the gradual middle income developmental transition the policy requirements get tougher and require sustained focus, implementation, sequencing and coordination.In general, markets have responded in an orderly fashion to this year’s two rate hikes by the Federal Reserve and its indications that it intends to start reducing its $4.5 billion balance sheet. Reasons for this include the fact that the policy moves have been well telegraphed and, earlier, they were accompanied by signs of a global growth pickup and the possibility of pro-growth policies in the US. More recently, however, the calming influence on markets has come much more from the strong belief – a too optimistic and overly partial one, I feel – that central banks are still fully able and willing to maintain a policy of repressing financial volatility. While willingness may be the case for the ECB and the Bank of Japan, it is less so for the Fed. And when it comes to ability, there is more room to debate continued effectiveness given negative policy rates and mushrooming balance sheets in Europe and Japan.The complacency comes, I believe, in the form of excessive reliance on central banks in advanced countries,and for understandable reasons. For several years now, markets have benefited enormously from central bank stimulus, be it ultra-low interest rates or the huge injections of liquidity under the various asset purchase programmes (also known as QE).These, together with aggressive forward guidance, have served not just to bolster asset prices but also to suppress volatility, making leverage-based trades even more profitable. Notwithstanding the fact that asset prices have become meaningfully decoupled from economic and corporate fundamentals, too many traders and investors are highly hesitant to change their portfolio positioning until they see unambiguous generalised evidence of a change in central banks’ policy reaction functions. With that, the buyon-dips mentality has become deeply entrenched in market psyche, and the liquidity trade is quite crowded.It is good news for oil importers such as India as this reduces their import bills and, by enhancing the purchasing power of Indian households and companies, can boost investment and consumption activity.It is hard to specify the exact timing. What is clear, however, is that the liquidity rally will be hard to sustain if fundamentals do not improve and validate what already are quite elevated valuations. For fundamentals to improve, the major advanced economies need a policy handoff — away from excessive reliance on central banks and in favour of a more comprehensive set of policies that includes pro-growth structural reform, greater fiscal responsiveness where there is room, targeted debt reduction operations, and better regional architecture in Europe, and improved global policy coordination. Note that this is less of a design and engineering problem, in the sense that the major elements of the solution are known, and much more a political implementation one. The current state of politics in too many advanced countries hinders sound economic governance.The answer to this question goes beyond emerging markets as it also depends on your policy and, therefore, political call for the US and Europe. Unless you believe in a timely policy handoff there, one approach to consider would be to reduce dollars at risk by lowering total exposure to risk assets, particularly stocks and high yield bonds, and to focus more of the remaining exposure to relatively underperforming segments, including emerging markets.It may well result in some country re-allocations but, by itself, should not cause a major dent to the asset class as a whole.