Foreign institutional investors (FIIs) are pulling money out of India’s secondary market at an accelerating pace, but their India strategy is far from a complete retreat. FIIs have withdrawn nearly Rs 2.8 lakh crore from listed stocks so far in 2026, even as they have invested more than Rs 47,000 crore in initial public offerings (IPOs).

The divergence points to a shift in how global funds are gaining exposure to India. Rather than buying existing stocks in the open market, FIIs are increasingly using IPOs to access new sectors, secure large allocations at predetermined prices and avoid pushing up the cost of their own purchases.

“FIIs are not completely exiting India, rather, they are changing how they own it,” Raj Gaikar, equity research analyst at SAMCO Securities, told ET Markets.

The trend is not new. FIIs invested nearly Rs 74,000 crore in India’s primary market in 2025, after putting in around Rs 1.21 lakh crore in 2024. In contrast, their secondary-market withdrawals stood at Rs 2.39 lakh crore in 2025 and Rs 1.28 lakh crore in 2024.

The pattern suggests that the primary market is becoming a more selective channel for foreign capital, even as listed stocks face selling pressure.

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Valuation, access drive IPO preference

According to Gaikar, listed stocks appear expensive to several global funds, while earnings growth has slowed. With other emerging markets offering better value, foreign investors have continued to trim their holdings in existing companies.

IPOs offer a different proposition. Anchor and qualified institutional buyer allocations allow large funds to purchase sizeable blocks in one transaction. Buying a similar quantity through the open market could push up the stock price and raise the cost of entry.

“IPOs offer a different deal,” Gaikar said. “Anchor and QIB allotments let a fund buy a large block in one go. Buying the same size in the open market would push prices up sharply.”

Issue pricing can also be set at a small discount to listed peers, he said, while new offerings provide access to themes that may not be adequately represented in benchmark indices.

“So funds sell expensive old paper and fund cheaper new paper,” Gaikar said. “This is a valuation and access call, not a vote against India.”

Tanvi Kanchan, associate director at Anand Rathi Shares & Stock Brokers, said the primary market offers FIIs “price certainty without market impact.” An anchor or QIB allocation is made within a fixed, pre-negotiated price band, allowing large investors to deploy capital without moving the market against themselves.

That is particularly relevant when index-heavy stocks are already richly owned, she said.

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The preference for IPOs also reflects a change in sector exposure. The listed market is heavily weighted towards established businesses in banks, IT services and consumer staples—sectors where growth has cooled, according to Gaikar.

FIIs have been cutting exposure to these segments, while new offerings have opened access to areas such as electronics manufacturing, consumer technology, renewables and capital-market businesses.

“Several of these have few listed peers. So an IPO is the only clean entry point,” Gaikar said.

The shift is tilting foreign portfolios towards domestic demand and manufacturing while reducing their exposure to rate sensitive names, he added.

Sector flow data for January through August 2026 shows financial services as the biggest drag on FII portfolios. Net outflows from the sector crossed ₹1 lakh crore during the eight-month period, more than three times the outflow from the next-largest sector.

Autos, oil and gas, FMCG, telecom and IT each recorded foreign sales of more than Rs 25,000 crore over the same period.

The contrast between secondary-market selling and primary-market participation is particularly visible in financial services. SBI Funds Management’s anchor book gave FIIs a clean, pre-priced entry into the sector even as sentiment towards financial stocks was weakening in the secondary market.

IPO pipeline keeps foreign investors engaged

India’s IPO pipeline has also expanded sharply. The pool of SEBI-approved and filed offerings is pegged at more than Rs 4.7 lakh crore, with potential offerings from marquee names such as Jio Platforms, the National Stock Exchange, PhonePe and SBI Funds Management drawing investor attention.

Issuance has gathered pace in the second half of the year. July and August alone accounted for roughly Rs 49,600 crore of the approximately Rs 72,000 crore raised between January and August.

However, FIIs have not been the primary force behind the broader IPO wave. Sustained domestic liquidity, including flows from mutual funds and insurance companies, has played a major role, Kanchan said.

FIIs, she added, have been “in a supporting, often selective role rather than leading the charge”.

The result is a two-track foreign-investment strategy: selling existing stocks where valuations and growth prospects appear less attractive, while selectively backing new offerings that provide better access, pricing visibility and exposure to emerging themes.