Lok Sabha Elections 2024: Exit Polls and Markets Don't Pass the Smell Test

On Monday, 3 June, India’s stock markets skyrocketed. Punters had been itching to bet on the bourses all weekend, anticipating the explosion. After all, the Exit Polls had predicted a more-than-expected sweep for the BJP-led NDA. Narendra Modi was projected to make a triumphal return to his third term in power.

What happened on counting day is known to all. When it became clear, early on, that the BJP will fall well short of the halfway mark, and will need the crutches of two hitherto fickle allies, the markets crashed. If the Sensex had risen by 3.4 percent on Monday, it fell by 5.7 percent the very next day, as equity investors adjusted to a new reality.

There is nothing unusual about this. Right after the BJP’s shock defeat in the 2004 elections, the markets had a collective meltdown at the prospects of the Left having a say in the government and dropped a whopping 6.1 percent.

Back then, the Securities and Exchange Board of India (SEBI), our stock market watchdog, had investigated some brokerages – including Goldman Sachs – to see if the fall had been orchestrated. Goldman got a clean chit in SEBI’s report, but tongues continued to wag, that some Indian investors had made money, by routing their cash through Foreign Institutional Investors (FIIs).

This question has returned again, 20 years later, thanks to the Congress party. The Congress is not willing to believe that the Exit Polls got it wrong due to incompetence. They say the polls were rigged to run the markets up so that some people could sell their holdings at a great profit, and leave the ordinary investor carrying the can.

What evidence does the Congress have for it? The party says FIIs bought a ‘mysteriously’ high number of shares, a day before the Exit Polls. The only possible trigger could be that some FIIs had an idea what the polls would say, and expected to make a killing when the markets opened after that. This, according to the Congress, is the ‘world’s first Exit Poll Scam,’ in which ordinary investors lost some Rs 30 lakh crore in wealth.

A deeper look at the numbers paints a much more complex picture.

The first point is that there was indeed a trigger available in the markets for FIIs to pump in money on 31 May: India’s weight in the MSCI Emerging Market Index was rebalanced on that day. Many FIIs which simply track that Index to calibrate their investments in emerging markets, would have automatically bought Indian equities. In fact, market watchers expected $2.5 billion to flow in on that day, which is roughly Rs 21,000 crore.

It is also clear that FIIs were hedging their bets, by buying 31,000 ‘short’ contracts in the Index futures on the same day. Such contracts are bought when investors expect the markets to go down. In other words, if FIIs bought shares expecting to make money if the markets went up after the results, they were also ready for the opposite to happen.

The second indicator comes from the trade data on which segments of the market bought and which ones sold shares on the day after the Exit Polls when the markets jumped, and on counting day when the markets collapsed. If on 31st May, FIIs were net buyers (purchases minus sales) of Rs 2,178 crore, they were net buyers to the tune of Rs 6,847 crore on the day after the Exit Polls. They only exited on counting day, when they were net sellers of shares worth Rs 12,244 crore. So, FIIs lost money, instead of making it.

If anything, it is the ‘retail’ investor who made money from the market fluctuations caused by the gap between what the Exit Polls predicted and the actual results. On 3 June, retail investors ‘net’ sold shares worth Rs 8,500 crore, effectively gaining from the big jump in stock prices. The next day, retail investors ‘net’ purchased stocks worth Rs 21,000 crore, when prices had collapsed. This seems to suggest that the retail investor made the smart choice.

But who are these ‘retail’ investors? On the face of it, they are the small investors with small portfolios. One estimate suggests that a typical demat account holder in India owns just three stocks. This average hides the fact that most of the equities held by this ‘retail’ segment of the market are in the hands of High Net-worth Individuals (HNIs) and family offices of big corporates. These are the people who account for the bulk of all daily trades in the Indian markets.

For instance, the NSE's data for the first four months of this year shows that out of the 1.35 crore investors who actively bought and sold shares each month, only 24,000 or 0.2 percent accounted for 76 per cent of all trades in the cash market. In the equity options market, which makes up 50 percent of all trades, just 30,000 investors accounted for 94 percent of trades.

So, it is extremely likely that most of the retail sales and purchases of stocks after the Exit Polls and on counting day were made by a very small number of big players. They sold on the day the markets went up, and bought back when they fell. Of course, these are ‘net’ purchase numbers, which hide the fact that some ‘retail’ investors would have been caught on the wrong side of these trades.

Does this mean that some big investors had got their own Exit Polls done, which were more accurate than the ones shown to the aam janta? One newspaper has reported that the same polling agencies had given different numbers to stock market honchos, including FIIs, and painted a completely opposite picture on TV.

It is possible that some big investors followed their own gut and played a contrarian game on the markets. The Exit Polls would then just be a gigantic case of ineptitude. However, this needs to be ruled out with a proper investigation by SEBI. On the first sniff, it doesn’t pass the smell test.

(The author was Senior Managing Editor, NDTV India & NDTV Profit. He now runs the independent YouTube channel ‘Desi Democracy’. He tweets @Aunindyo2023. This is an opinion piece. The views expressed above are the author’s own. The Quint neither endorses nor is responsible for them.)