Despite prevailing market uncertainties, Foreign Portfolio Investors (FPIs) are showing significant interest in Indian Initial Public Offerings (IPOs). This seemingly paradoxical behavior can be attributed to a number of compelling factors that make the Indian primary market an attractive destination for foreign capital.

India's Growth Story and Potential for Higher Returns

FPIs are drawn to Indian IPOs due to the country's strong economic fundamentals and the potential for high growth. India's GDP growth underscores the resilience of its economy. IPOs provide an opportunity to invest in companies early in their growth cycle, potentially leading to substantial returns. Despite global headwinds, India's strong economic performance, including GDP growth, reduced fiscal deficit, manageable current account deficit, and robust sector growth and industrial production, continues to attract many FPIs.

Attractive Valuations and Unique Business Models

Compared to established, listed companies, IPOs often offer more attractive valuations, appealing to value-seeking investors. Many IPOs bring differentiated and unique business models to the market, providing diversification opportunities for investors. FPIs may find that primary market issues are at comparatively lower valuations, while valuations in the secondary market remain high.

Contrasting Strategies: Primary vs. Secondary Markets

The increased FPI participation in Indian IPOs contrasts with their cautious approach in the secondary market, where they have been net sellers. This highlights a nuanced investment strategy where FPIs are selective, focusing on specific opportunities in the primary market while reducing exposure to the broader market due to concerns about stretched valuations, geopolitical tensions, and tariff-related uncertainties.

Recent Trends and Data

In the first five months of 2025, FPI investment in IPOs reached $1.8 billion. While this is lower than the $4 billion invested in the same period last year, the average IPO size has doubled, indicating a selective approach focusing on larger, more stable companies. Despite being net sellers in the secondary market, FPIs have significantly increased their investments in Indian IPOs, with a threefold surge in anchor investments. Domestic Institutional Investors (DIIs) have also shown increased appetite, further contributing to the IPO market's strength.

Factors Influencing FPI Caution and Selectivity

It's important to note that FPIs are treading cautiously in the domestic primary market amid high market volatility and a slower pace of IPOs. Several factors contribute to this caution:

• Global uncertainties: Concerns about global economic conditions, potential recession, and geopolitical conflicts lead to market volatility and risk aversion.
• Interest rate uncertainty: Fluctuating interest rate outlooks in the US and Europe make emerging markets like India less attractive.
• Overvaluation concerns: Aggressive pricing by issuers, especially in the startup space, has led to valuation concerns.
• Poor post-listing performance: Several IPOs from the previous year have underperformed post-listing, deterring repeat FPI investment.

Looking Ahead

Despite the current caution, experts anticipate a return of FPIs to Indian equities as global economic conditions stabilize and confidence returns. India's strong domestic fundamentals, improving regulatory environment, and a robust pipeline of promising companies make it a preferred destination for foreign capital.

In conclusion, while market uncertainties persist, FPIs are strategically betting on Indian IPOs due to the potential for high growth, attractive valuations, and unique business models. Their selective approach reflects a nuanced understanding of the Indian equity landscape, balancing risks and opportunities in a dynamic global environment.