The blue wire controls the Charge Indicator light in your dash. The light is "on," when the alternator is not outputting 12v or more (so it should be on when the engine is off), and the light goes out while the alternator is outputting 12v+.
Putting a diode in line with that blue wire from the alternator to the instrument cluster supposedly stops the Charge Indicator light from dimly glowing all the time after startup. I've been able to see mine glowing at night since I got my bike, and have never had an issue. Reconnect that blue wire next to the large red wire on the alternator and hopefully it should behave normally.