Congress refuses to believe that the exit polls were wrong due to incompetence.
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The BJP’s Congress party argues that the exit polls are manipulated to inflate the market and allow some people to sell their holdings and make big profits, while ordinary investors suffer losses.
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(Image: The Quint/@Vibhushita Singh)
Indian stock markets soared on Monday, June 3. Investors had been itching to place bets on the stock exchanges all weekend, anticipating the surge. After all, exit polls had predicted a much larger-than-expected victory for the BJP-led NDA, and Narendra Modi was expected to make a triumphant return to power for a third term.
We all know what happened on vote counting day. When it became clear early on that the BJP would fall well short of the midpoint and would need the support of its two previously mercurial allies, markets tanked. If the Sensex index rose 3.4% on Monday, it fell 5.7% the next day as equity investors adjusted to the new reality.
There is nothing unusual about this: Shortly after the BJP’s shock defeat in the 2004 elections, the prospect of the Left having a say in government sent markets into a frenzy, with stocks falling 6.1%.
At the time, the Securities and Exchange Board of India (SEBI) was investigating several brokerages, including Goldman Sachs, to see if the stock market crash had been engineered. Although the SEBI report cleared Goldman, rumors continued to circulate that some Indian investors had made money by funneling funds through foreign institutional investors (FIIs).
Twenty years later, the issue has come up again thanks to the BJP, which refuses to believe that the exit polls were wrong due to incompetence: They argue that they were rigged to inflate the market, allowing some people to sell their stock holdings at a huge profit while ordinary investors lose out.
What evidence does the Indian National Congress have? The party claims that foreign investors bought “inexplicably” large amounts of shares the day before the exit polls. The only possibility is that some foreign investors knew about the results of the polls and were hoping to make a killing when the markets opened afterwards. The Indian National Congress claims that this is “the world’s first exit poll scam” and that ordinary investors lost about Rs 30 lakh crore.
A closer look at the numbers paints a much more complicated picture.
First, there was indeed a catalyst in the market for FIIs to inject funds on May 31. On that day, India’s weighting in the MSCI Emerging Markets Index was rebalanced. Many FIIs who were simply tracking that index to adjust their emerging market exposure would have automatically bought Indian stocks. In fact, market watchers were expecting $2.5 billion, or roughly Rs 21 trillion, to inflow on that day.
It is also clear that the FIIs were hedging their bets by buying 31,000 “short” contracts in index futures on the same day. Such contracts are purchased when investors expect the market to fall. In other words, if the FIIs bought the stocks in the hope of profiting if the market rose after the results, they were also prepared for the opposite to happen.
The second indicator comes from trade data showing which segments of the market bought and sold shares on the day after the exit polls, when the market soared, and on the counting day, when the market crashed. On May 31, FIIs were net buyers (purchases minus sales) of Rs 2,178 crore, but the day after the exit polls they were net buyers of Rs 6,847 crore. They only exited on the counting day, making net sellers of shares worth Rs 12,244 crore. In other words, instead of making profits, FIIs incurred losses.
It was more likely that ‘retail’ investors were the ones who profited from the market volatility caused by the gap between exit poll predictions and the actual results. On June 3, retail investors sold shares worth ‘net’ Rs 8,500 crore, effectively profiting from the surge in share prices. The next day, retail investors bought shares worth ‘net’ Rs 21,000 crore, and share prices crashed. This would seem to suggest that retail investors made a wise choice.
But who are these “retail” investors? On the surface, they are small investors with small portfolios. By one estimate, the typical demat account holder in India owns just three stocks. This average hides the fact that most of the stocks held by this “retail” segment of the market are in the hands of High Net Worth Individuals (HNIs) and large corporate family offices. These people account for the majority of daily trading in the Indian markets.
For example, NSE data for the first four months of this year shows that of the 1.35 million investors who actively trade stocks each month, just 24,000, or 0.2%, accounted for 76% of all trading in the spot market. In the equity options market, which accounts for 50% of all trading, just 30,000 investors accounted for 94% of trading.
So it’s very likely that the majority of retail stock buying and selling after the exit polls and on election day was done by a very small number of large investors who sold on days when the market was up and bought back on days when it was down. Of course, these are “net” purchases, which hide the fact that some “retail” investors got caught on the wrong side of these trades.
Does this mean that some big investors conducted their own exit polls that were more accurate than the one shown to the yuan? One newspaper reported that the same polling agency gave different figures to stock market heavyweights, including foreign investors, and painted a completely opposite picture on television.
It is also possible that some big investors were following their instincts and playing a contrarian game in the market. In that case, the exit polls are just a huge case of incompetence. But this needs to be weeded out with a proper investigation by SEBI. At first glance, it looks suspicious.
(The author is a Senior Editor at NDTV India and NDTV Profit. He currently runs an independent YouTube channel. ‘“Desi Democracy,” he tweeted. FollowThis is an opinion piece. The views expressed above are the author’s own. Quint We do not endorse or take responsibility for them.
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