Increasing Free Float Is Driving Foreign Money In Indian Markets | Open Interest

Indian markets have not been outliers compared to their Asian or global peers. The markets are just a few percentage points away from their all-time highs, but the momentum for a sustained rally appears to be missing.

In the last two quarters, fund flows — both domestic and foreign — have primarily chased new share issuances rather than buying in the open market. This lack of demand in the secondary market has kept prices moving sideways.

Two key liquidity pools drive and sustain the markets:

1. Retail money — both direct equity investments and mutual funds.

2. Foreign flows — driven largely by an increase in fresh market free float.

The benchmark indices have barely delivered returns over the past 12 months. Despite this, retail investors have continued to invest, though the pace has slowed. Direct retail flows into equity markets declined in the first two months of the current fiscal year due to a drop in young investors, slower IPO activity, and volatile markets triggered by trade tariffs, geopolitical tensions between India and Pakistan in April–May, and the Israel–Iran conflict in June.

According to the National Stock Exchange, young investors have dominated retail participation, although their share has declined over the past year.

The share of registered investors under 30 years of age fell from 40% in March 2024 to 39.5% in March 2025 and further to 39.2% in May 2025, according to NSE Market Pulse. The drop can be attributed to a decline in the share of new investors under 30 — from 58.8% in FY24 to 53.2% in FY25 — though this rebounded to 56.1% in the first two months of FY26.

Gross flows into mutual funds have also dipped during this period. However, disciplined investors have continued with their SIPs (systematic investment plans), and inflows through SIPs remain at an all-time high.

Retail investors have largely paused lump-sum investments in mutual funds and direct equities, which is evident from the slow, sideways movement in benchmark indices and the declining average daily turnover. The average daily turnover has dropped in the last quarter across the cash segment and equity derivatives.

Meanwhile, flows are chasing select sectors for returns. Defence has been the biggest beneficiary, with the sectoral index up 37.45% in the first quarter of this year, followed by Nifty Media, Nifty Small Cap, Nifty Realty, and Nifty Midcap 100. FMCG, Pharma, and IT sectors have seen the least gains and even outflows during this period.

The second key factor is foreign investor flows. While foreign flows have been negative for the current calendar year and over the past year, that's only half the picture — they have turned positive over the last three months. A closer look reveals that foreign investors have been pouring money into free-float-generating issuances, such as QIPs, promoter equity sales, PE exits, and IPOs.

A recent Jefferies report supports this trend, noting that promoter and PE exits accounted for 75% of the supply, while QIPs and IPOs accounted for the remaining 25%. The market saw $27 billion of new issuances just in the first quarter of the current fiscal year.

So, if markets and companies are richly valued, why is there demand for these fresh and secondary offerings?

The answer is straightforward — the pricing of these issues is fair and offered at a slight discount to prevailing market prices. Moreover, these issuances are structured so they do not disrupt secondary market demand and supply. Most are done through separate trading windows, thereby avoiding direct impact on the regular market.

By being offered at a discount, these shares allow investors to acquire stakes without driving up market prices, which are already at premium valuations. IPO pricing has also been more reasonable, without steep listing premiums, as recent listings show.

These offerings have another important impact: India's overall free float has increased over the last few quarters. With $27 billion raised in just one quarter, India's free float in global indices has risen, boosting its weight in global emerging market benchmarks — and driving further foreign flows.

It is estimated that fresh equity worth $65–80 billion is expected to hit the market in the current financial year, including over $5 billion from public sector companies to meet divestment targets. These new issues are likely to be absorbed by foreign and domestic investors alike.

The steady supply of fresh paper should ensure continued liquidity from foreign funds benchmarked to global indices. Additionally, midcap and small-cap stocks stand to benefit as improved liquidity and higher market capitalisation make them more accessible to large institutional investors.