How (not) to read market swings in election season

Did something suspicious and worrying happen on the National Stock Exchange between 31st May and 4th June? Rahul Gandhi claims it did and wants an investigation. But how do we judge if he’s right? Only by examining the facts. So let me present those made available by Praveen Chakravarty, Chairman of the All India Professionals’ Congress. I’ve chosen Chakravarty’s version because, I presume, it accords most closely with Gandhi’s.

First, “the value of shares bought and sold” on the NSE on 31st May was double the previous day’s tally. Although something similar happened in May 2014, when Narendra Modi won his first majority, Chakravarty says this is “very rare”. Even in 2020, when the World Health Organization declared Coronavirus a global pandemic, stock market activity only rose 22% above the previous day.

Second, Chakravarty says NSE’s own data establishes that “foreign investors accounted for 58% of all the buying of shares” on the 31st. He adds: “this was surprising because on every day in the prior week, foreign investors were not buying in such large proportions and were net sellers”.

So what made FIs such large buyers? Chakravarty ignores the fact on the 31st they were equally large sellers. Instead, he claims this “can only be explained by what happened the next day”. That’s when the exit polls came out.

The connection Chakravarty makes suggests either FIs had advance knowledge of the polls or had commissioned their own. But could there be a third reason that explains FI behaviour?

Chakravarty thinks not. “Surely, it cannot be a mere coincidence that an extremely rare event like doubling of stock market trading happened exactly one day before multiple exit polls unanimously projected an enormous victory for Modi.” But why can’t it be a coincidence? Indira Gandhi died 24 hours after speaking about her own death and that was only a coincidence.

Let’s take the story one step further. FIs bought shares on the 31st but on 3rd June, after the exit polls, the stock market rocketed. So if they sold at that point they would have made a huge profit. Chakravarty is raising questions about its legitimacy.

There’s no doubt about how he answers such questions. “From the chronology of events and stock market data, one can easily impute that not only were exit polls weaponized to influence election outcomes but to also profit using the stock markets. India may have witnessed the world’s first ‘exit poll stock market scam’.”

Let’s disregard the possibility media-commissioned exit polls were leaked. Suppose FIs commissioned their own, which pointed in the same direction, wouldn’t it be legitimate for them to buy shares based on such information? The only question is would FIs bother to commission such polls? I doubt it.

Let’s come to ordinary Indian investors. First, this is what they were told. Narendra Modi said to the Economic Times (23/5): “I can say with confidence that on June 4, as the BJP hits record numbers, the stock market will also hit new record highs”. Earlier the Home Minister told NDTV (13/5): “I suggest you buy (shares) before June 4. It will shoot up.”

If they acted on this advice, they would have found on 4th June, after the results, the stock market had crashed and their shares had lost value. That day the stock market loss was 30 lakh crore, the biggest ever in history.

So on the 4th ordinary investors were losers. But three days later, when the stock market closed for the week ending Friday 7th, it not only recovered the losses made on the 4th but rose to an all-time high. At this point their losses would have been more than made up.

This means the ‘problem’ is with FIs. But does it call for an investigation? If you suspect FIs were proxies on behalf of individuals or institutions in India then an investigation might be necessary. But if you don’t? Suppose you conclude they were only taking a genuine punt? In that event is further action needed?

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