Markets undeterred by AAP, Third Front; see Modi as frontrunner: analysts

The BSE Sensex has corrected 5 per cent since January 24 amid a selloff across emerging markets. Part of the selling was on account of redemptions by foreign institutional investors (FIIs), who sold close to $900 million or Rs. 5,600 crore (1 USD=62 rupees) over nine sessions till Wednesday.

Despite the sharp selloff, Indian markets have held on to crucial levels - in particular the 200 day-moving average, which is considered to be a long-term support for markets. The Sensex and Nifty breached the key level earlier this week for the first time in four months, but bounced back to close higher.

Analysts attribute the resilience in markets to rising hopes of a stable government post elections due in May. Markets want a government that could steer India's economy out of the prolonged slowdown and currently Narendra Modi-led BJP looks the clear frontrunner, traders say.

Mehraboon Irani of Nirmal Bang told NDTV that hopes of a Modi-led government post elections are already priced in.

Bank of America Merrill Lynch in a recent report said that the BJP is still the frontrunner. Three opinion polls released over the past 10 days all showed that BJP was gaining strength and could get its highest ever seats, the report says.

The opinion polls have re-energised hopes of a Modi-led government, which had taken a backseat after the emergence of the Aam Aadmi Party in the recently held assembly elections.

"The impact of AAP will be localized," said Jyotivardhan Jaipuria and Anand Kumar of Bank of America.

The Bank of America analysts said a Third Front (i.e. non-Congress, non-BJP) government can still be a possibility if a group of 14 regional parties including Nitish Kumar's JD(U), Jayalalithaa's AIADMK, Mulayam Singh's Samajwadi Party, CPI and CPI(M) win around 100 seats in the upcoming general elections.

However, history is loaded against the Third Front formations, the analysts noted.

"India has seen Third Front governments thrice (1977-80, 1989-90, 1996-98), twice with the Congress support and once in coalition with Jana Sangh (predecessor of the BJP). However, on all the three occasions, the government could not complete its full term," the Bank of America analysts said.