What explains heightened foreign investor activity on May 31?

The party's spokespeople have alleged that on May 31 more than doubled ahead of the exit polls the next day. The exit polls predicted a thumping victory for the BJP, resulting in the jumping close to 3.4% each on June 3 - the biggest rally in a day since February 2021. The Congress party spokesperson has alleged that some investors - mainly foreigners - bought Indian shares in large proportions ahead of the exit polls that predicted a thumping victory for the BJP-led NDA. The party representative however said they are not aware of the identity of these investors.

Did volumes surge on May 31? Did foreigners buy on that day?

Yes. The total volume in the cash market (shares only) on May 31 was ₹2.38 lakh crore (₹2.38 trillion), which was almost double the five-day daily average of ₹1.2 lakh crore (₹1.2 trillion). Foreigners net bought shares worth ₹2,178 crore after remaining net sellers during the previous two trading sessions. They were net sellers to the tune of ₹25,260 crore in May and ₹6,820 crore in April.

Is the foreign buying on May 31 significant?

The net buying figure by of ₹2,178 crore on that day is higher than most days in May but may not be significant in comparison with some of the large purchases that foreigners have made in the past. But the gross purchases of over ₹95,000 crore were sizable, which indicated heightened activity by foreigners. In May, the highest gross buying by on a single day was ₹37,500 crore.

What could be the reason for higher-than-normal foreign activity that day?

One of the key reasons for the sharp surge in foreign volumes could have been on account of the flows and related trading activity around the index provider MSCI's quarterly rejig on May 31.

Why is MSCI rejig significant in this context?

MSCI adds and removes stocks of various countries, including India, from its global indices once in a while based on certain parameters. Changes to MSCI indices are widely watched as global passive funds like Exchange Traded Funds (ETFs), whose portfolios mimic these indices, must also make corresponding changes to align their holdings. When these foreign ETFs make changes to their portfolios in line with the MSCI tweaks, it results in inflows and outflows. On May 31, MSCI's quarterly rejig came into effect with 13 Indian stocks being added to the MSCI Global Standard Index, while three stocks were excluded. This resulted in net passive fund flows of about $ 2 billion (₹16,500 crore) on that day. Their gross activity on account of the rebalancing would have been much higher.

In addition to the passive funds that buy and sell as part of index rebalancing, there are several investment vehicles - including foreign - that wager on the stock price moves ahead of their inclusions or exclusions in the indices.

Market watchers said many of such funds would have exited their trades on May 31 with the inclusion taking effect. In the past, volumes have been higher on such index rebalancing days.

"Most of the significant FPI purchases and volumes on May 31 were due to passive flows resulting from the MSCI rebalancing, which occurred primarily in the last 30 minutes of trading," said Abhilash Pagaria, Head of Alternative & Quantitative Research, .

"Other than that, there was nothing exceptional about the foreign flows that day."