Commerz Bank has come up with a report with the outlook on the Indian markets.

Oliver Stoenner, Head at Emerging Market Research at Commerzbank says the Sensex is trading near the levels that the markets saw at the beginning of May.

But Stoenner doesn't think that the economic environment has improved in the same way.  Hence, as per him, another correction is not ruled out.

"There could be a risk for another correction if we get some more disappointment, maybe from the US or from within India. So the current levels are not sustainable for very long run," Stoenner says.

Excerpts from CNBC-TV18's exclusive interview with Oliver Stoenner:

Q: With crude under USD 70, it seems that the Fed may pause. What is your outlook on the Indian market right now and have you revised your GDP outlook at all?

A: What surprised me a bit is the fairly strong rebound that we have seen in the Sensex over the last couple of weeks. From my perspective it went a bit too far. Currently, I see the Sensex trading near the levels that we saw at the beginning of May. But the economic environment has not improved in the same way.

So there could be a risk for another correction if we get some more disappointment, maybe from the US or from within India. So the current levels are not sustainable for very long run.

Q: Couple of economic data have come out over the past quarter. One is that the results in the first quarter earnings seem to have surprised on the positive. Secondly, if the US slow down news continues the way it is then we could see softer commodity prices. Crude and copper are already lower and perhaps even a picking up of interest rates. Would that lead to a possible situation where you would revise up your GDP forecast?

A: As regards to GDP forecast, if we get around 8% levels for 2006; this would be a very positive trend. In my view you probably have this positive effect from lower commodity prices.

But on the other hand I expect some more from the Indian Reserve Bank. So I expect some more tightening until the end of the year and also in 2007.

This should have dampening effect on corporate and on the overall sentiment in the economy, despite the current efforts by the government to keep liquidity on the very higher level. At the current point, I would not revise my GDP forecast upwards.

But for the financial investor it is also important to see the difference between the growth level and the quite high valuation level of the stock market, which doesn’t seem very cheap at the moment.

Q: The fact that you probably see a correction right now. How much of a correction in terms of percentage would you be comfortable with? Secondly, you made a point of the tightening policy but at what level would you peg the RBI tightening, its rates further and what sort of projections you have for that?

A: First I would not expect a rapid fall. The current level of above 11,000 seems to be a bit exaggerated. In my perspective, institutional investors bought into the Indian growth story because it has a very strong domestic momentum.  This is important if you are looking for negative effects from the US slowing on the rest of Asia.

 Therefore, India is very popular at the moment and investors may start to diversify away from India if it gets some more positive views on the other Asian markets.

The second thing is I would expect probably another two interest rates hikes to about 50 basis points until the first quarter 2007.