The activity of the stock market as the general elections drew to a close has been a subject of controversy. Indian stocks hit record highs after most exit polls predicted a massive win for the BJP. They crashed on June 4, the day of the results, when it became clear that the BJP was not getting a simple majority.
Is there a case to be made that the volatility of the stock market – with the highs in the run-up to and after the exit polls – hurt retail investors while benefiting “dubious foreign investors,” as the Congress claimed after the results?
On May 31, a day before the last day of voting when exit poll results were announced, the total traded value of the stocks doubled. On June 3, the first day of trading following the exit polls, the National Stock Exchange’s Nifty-50 closed 3% higher from the reading on the previous day.
On June 4, the BJP’s tally was below the majority mark but the National Democratic Alliance managed a tally of 292 seats — well short of what most exit polls predicted. Nifty-50 tumbled by nearly 6% (Chart 1). This was its steepest fall since March 23, 2020, when it plunged by 13% after India went into lockdown to contain the spread of COVID-19. The fall on June 4 wiped out ₹30.9 lakh crore of investor wealth.
Chart 1 shows the movement of the NSE Nifty-50 in the days leading up to the election result.
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Queering the pitch was Union Home Minister Amit Shah’s statement on May 13. He said, “I suggest that you buy [shares] before June 4. It will shoot up”. On May 19, Prime Minister Narendra Modi said that during the week when the results would be out, the stock market would “touch such highs” that technicians “would be tired of the action” [sic].
Data show that the heightened stock market activity on May 31 was largely driven by heavy trading involving foreign portfolio investors (FPIs). As Chart 2 shows, the total trade value doubled from ₹1.1 lakh crore to ₹2.3 lakh crore on May 31. FPIs were the largest buyers that day, as they bought shares worth ₹95,500 crore – 41.8% of the total. FPIs also sold 41% of the shares that were sold that day.
Chart 2 shows the total traded value in Rs. crore.
FPIs were largely net sellers on most of the days till May 31, when they turned net buyers (₹1,541 crore). They were also net buyers on June 3 (a day before the results) to the tune of ₹6,617 crore. They were net sellers on June 4 (₹12,511 crore).
In other words, FPIs were net buyers on the days when the stock market went up (May 31 and June 3) and net sellers on the day when the index tanked (June 4) (Chart 3). Mutual funds were also net buyers throughout the period barring the days when the markets crashed. For example, on June 4, mutual funds were net sellers to the tune of ₹6,249 crore.
Charts 3 a, b and c show the daily net turnover (shares bought minus shares sold) of different categories of investors such as retail investors, FPIs, and mutual funds from May 2 to June 5.
In contrast, retail investors (who include individual domestic investors besides NRIs, high-net-worth individuals, and sole proprietorship firms) were buyers on June 4 with net flows of ₹21,179 crore. Were they buying the dip when the market crashed? Retail investors were net sellers on May 31 and June 3 when the markets soared. Were they booking profits on these days? The retail investors were net sellers of ₹8,588 crore on June 3 – the same day when FPIs and mutual funds were net buyers.
Considering the contrasting behaviour of retail investors and their net turnover as opposed to other categories of investors, it is difficult to claim, as the Congress has done, that retail investors suffered huge losses on June 4 as opposed to other categories of investors.
Source: National Stock Exchange
nihalani.j@thehindu.co.in
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