Is India's IPO boom sucking liquidity from stock market?
What's the story
The Indian stock market has been on a downward trend for two years, with the Nifty 50 index declining by 2% over the last two years and 2.5% in the last year. The index has fallen by over 7% this year after hitting a record high of 26,373 on January 5. It last crossed the 25,000 mark on February 27 and has since remained between 22,000 and 24,000.
Market dynamics
Factors behind Nifty's underperformance
The underperformance of the Nifty 50 index can be attributed to weak earnings, geopolitical and geoeconomic risks, foreign capital outflows, and currency weakness.
High oil prices, a mismatch between earnings growth and market valuations, and the absence of AI trade have also contributed to the domestic market's poor performance.
However, some experts believe that a surge in IPOs this year could be limiting retail liquidity.
IPO influx
Boom in IPOs limiting retail liquidity
According to brokerage firm Swastika Investmart, 59 mainboard and 113 SME IPOs have hit the primary market this year, raising a total of ₹77,400 crore. Of this, mainboard IPOs have raised ₹72,000 crore.
G Chokkalingam, the head of research at Equinomics Research, said that high oil prices and a renewed boom in IPOs are major reasons for the poor performance of domestic equity markets.
He also noted that the renewed boom in IPOs is limiting liquidity available to secondary markets.
Market challenges
'Every rupee in primary issue means less for secondary market'
Harshal Dasani, Business Head at INVAsset PMS, also highlighted the IPO wave as a real market challenge.
He said that the scale of supply, with 238 companies looking to raise around ₹4.72 lakh crore, does limit index upside.
This is because every rupee invested in a primary issue is one less bidding for secondary-market stock.
However, Dasani added that retail participation in IPOs has been subdued this year compared to institutional demand.
Investor behavior
Institutions and HNIs are funding IPO wave
Despite the IPO boom, retail liquidity remains intact and disciplined, with steady inflows into the secondary market through SIPs.
Dasani stressed that institutions and HNIs are funding this wave, not retail investors.
He also said that the index's drift is better explained by heavyweight underperformance, unresolved global macro factors, and FII flows only now turning, with IPO supply acting as an additional weight rather than a primary cause.
Market reallocation
Volatility has increased over the last 2 years
CA Kresha Gupta, Director and Fund Manager at Steptrade Capital, said that instead of draining liquidity, IPOs cause a reallocation effect.
She explained that when the broader market revives, IPOs tend to outperform secondary market activity.
Gupta also noted that volatility has increased over the last two years and the Indian stock market has undergone a natural revaluation due to macroeconomic factors such as war disruptions, tariff imposition, FIIs pulling out money, export headwinds, and corporate earnings.