Ridham Desai, Joint MD of Morgan Stanley believes the markets are basically heading lower rather than higher in the coming months. He sees 11,500 as the December 2007 target for the Sensex.

Desai discusses the markets' behaviour currently and what one can expect in terms of flows, investor interest and levels, going forward. 

Excerpts form CNBC-TV18's interview with Ridham Desai:

Q: Is the worst over after this fall?

A: Not really; the market will make its intermittent rallies, but I think there is more upside than downside. Valuations may appear okay, but I am a bit worried about earnings beyond this quarter. I think earnings for this quarter maybe okay, but going beyond this quarter, I think we may see some risk to earnings coming from slower GDP growth, which is what we are forecasting.

Q: There seems to be a general feeling that at the end of this quarter with the guidance which comes in and maybe with lower inflation, you could actually see the market getting some support in April. Do you expect to hear anything positive that might turn sentiment around in April?

A: The earnings should be good in April, but let's put it into context of expectations, which are still very high. So the market generally expects earnings to be good. I think it will be hard for companies to beat those expectations and that’s where the catch lies.

So it’s not about the absolute earnings performance, which I think will be okay; it’s about where the earnings come relative to expectations. That’s where my tentativeness lies. What we will see is a continuation of this week’s trend. It would be aggressive sector rotation in and out of companies and sectors that tend to surprise the market positively or negatively as the case may be.

Q: More than earnings, people talk more about inflation cooling; what kind of interest rates signals will come in from the RBI, that seems to be the bigger trigger for the market? What is your own expectation about inflation and what you will hear from the RBI in terms of interest rates in April?

A: I think there are three key factors here. There is a macro case, I think inflation is a symptom here. The problem is that demand is running ahead of supply and the only way we can fix that over the next few months is by a slowdown in growth.

I don’t think the markets are pricing that in. Inflation is just symptomatic of the excess demand that we have over supply. The headline inflation number creates noise but it doesn’t really determine the trend.

The second is what happens on the political front, there are several elections coming up over the next several months with UP being the next one. That will creates its own noise level for the market and generally speaking, I don’t think it’s going to be very positive. As usual we will see anti incumbency votes and that will produce reactions.

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