Foreign Investor Behavior in India: The Divergence Between IPO Enthusiasm and Secondary Market Disengagement

Foreign investors in India have exhibited a strikingly divergent behavior in recent years, with a pronounced shift toward primary market investments—particularly IPOs—while simultaneously withdrawing from the secondary market. This trend, which has accelerated in 2024 and 2025, reflects a strategic recalibration of capital allocation driven by valuation dynamics, regulatory reforms, and sector-specific opportunities.

The Allure of IPOs: A Strategic Shift

According to a report by The Economic Times, foreign portfolio investors (FPIs) injected ₹1.22 lakh crore ($14.5 billion) into Indian IPOs in 2024, more than offsetting their net sales of ₹1.21 lakh crore ($14.37 billion) in the secondary market, resulting in a net inflow of ₹426.9 crore ($124 million) FPIs bow to IPO allure, but walk out of secondary markets^[1]. This shift is not merely quantitative but qualitative, as IPOs are increasingly perceived as a gateway to high-growth opportunities.

The primary market's appeal lies in its valuation advantage. The MSCI India index, trading at a price-to-earnings (P/E) ratio of 25.4x, appears overvalued compared to emerging markets like China (14.6x) and South Korea (12.4x) FPIs bow to IPO allure, but walk out of secondary markets^[1]. In contrast, IPOs often offer entry points at more attractive valuations, particularly for companies with strong growth potential. For instance, the Urban Company's IPO saw a 64% surge on its listing day, underscoring investor confidence in new offerings FPIs bow to IPO allure, but walk out of secondary markets^[1].

Regulatory reforms by the Securities and Exchange Board of India (SEBI) have further amplified this trend. By streamlining processes and enhancing transparency, SEBI has made it easier for FPIs to participate in IPOs Foreign Investors Flock to Indian IPOs, Tripling Anchor Investments Despite Secondary Market Selloff^[3]. Additionally, anchor investments by FPIs in IPOs have tripled to 46% of total anchor investments in 2025, signaling a deepening trust in the primary market Foreign Investors Flock to Indian IPOs, Tripling Anchor Investments Despite Secondary Market Selloff^[3].

Secondary Market Disengagement: A Cautionary Tale

While FPIs are flocking to IPOs, their disengagement from the secondary market is equally noteworthy. Data from CNBC reveals that foreign investors sold $20.7 billion worth of Indian equities in the secondary market in 2024, despite investing $4.8 billion in IPOs FPIs bow to IPO allure, but walk out of secondary markets^[1]. This divergence is driven by several factors:

1. High Valuations: The secondary market's elevated P/E ratio has made it less attractive, especially as global uncertainties—such as potential U.S. tariffs on Indian exports—loom large FPIs bow to IPO allure, but walk out of secondary markets^[1].
2. Sectoral Volatility: In early 2025, FPIs withdrew heavily from sectors like automobile, financial services, and FMCG. For example, the automobile and auto components sector faced a net outflow of ₹3,279 crore, while financial services saw a cumulative outflow of ₹31,940 crore over four fortnights FII & FPI Investment Trends | Sector-Wise Market Analysis^[2].
3. Strategic Repositioning: The IT sector, a traditional FPI favorite, lost weightage in portfolios as investors repositioned capital toward more dynamic opportunities FII & FPI Investment Trends | Sector-Wise Market Analysis^[2].

Sectoral Insights: Winners and Losers

The sectoral breakdown of FPI flows in early 2025 highlights the uneven impact of this trend. The telecom sector emerged as a bright spot, attracting a net inflow of ₹5,661 crore FII & FPI Investment Trends | Sector-Wise Market Analysis^[2]. This contrasts sharply with the FMCG sector, which recorded an outflow of ₹12,332 crore, reflecting waning confidence in consumer-driven industries amid macroeconomic pressures FII & FPI Investment Trends | Sector-Wise Market Analysis^[2].

Future Outlook: A Tipping Point for Indian Capital Markets?

The Indian IPO market's robust performance—marked by 234 IPOs in 2023 (the highest since 2017) and a $3.3 billion offering by a major automaker in 2024 Coming of age: A strong year for India’s capital markets^[4]—suggests that this trend is here to stay. A strong domestic investor base, with equity mutual funds managing $850 billion in assets by mid-2025, further bolsters liquidity and investor confidence FPIs bow to IPO allure, but walk out of secondary markets^[1].

However, the secondary market's resilience cannot be overlooked. Despite outflows, it remains a critical component of India's capital markets, offering opportunities for investors who can navigate high valuations and geopolitical risks FPIs bow to IPO allure, but walk out of secondary markets^[1].

Conclusion

Foreign investors' divergent flows between IPOs and secondary markets underscore a strategic shift toward value-driven, high-growth opportunities. While IPOs offer a compelling narrative of growth and regulatory support, the secondary market's challenges—rooted in valuation and sectoral volatility—necessitate a cautious approach. As India's capital markets evolve, the interplay between these two dynamics will likely shape the trajectory of foreign investment in the region.