India's state social security and pension fund, undeterred by trade union resistance, will start investing in equity markets next month, the labour minister said, part of a broader push by Prime Minister Narendra Modi to move away from socialist ways rooted in decades-old labour laws.

With more than $100 billion of assets from some 80 million members, the Employees' Provident Fund Organisation (EPFO) is one of the world's largest. It will begin by investing in Indian exchange traded funds, with the goal of earning higher returns.

"We are starting with 1 per cent in July and by the end of this (fiscal) year it will go up to 5 per cent" of annual investments, Labour Minister Bandaru Dattatreya told Reuters in an interview late on Wednesday.

India's fiscal year ends March 31.

Dealers in Mumbai said news of the imminent entrance of EPFO into equity funds helped the and stock markets on Thursday, which closed at a one-month high led by a rally in housing stocks.

The investment in equity instruments was approved by the government in April, but the timing had not previously been known.

An EPFO official said the fund annually invested nearly Rs 1 lakh crore ($15.72 billion), out of which it could put nearly Rs 5,000 crore ($785.95 million) into equities between July and March.

On average, foreign funds have put about $1 billion a month into Indian shares over the past two years.

LABOUR REFORM

Appointed by Modi last November, the soft-spoken Dattatreya, 68, has convinced some trade unions that the benefits of investing in stocks are greater than the risks. Others remain wary.

To win support for this and other politically unpopular labour reforms, Modi has agreed to make it easier for casual workers to enter EPFO, a move opposed by some businesses who will have to contribute more.

The moves are part of Prime Minister Narendra Modi's agenda to reform Asia's third largest economy.

The new rules allowing EPFO to invest in shares may also help Modi hit an ambitious target of raising nearly $11 billion through selling stakes in state-run firms and minority stakes in private companies this fiscal year, a senior government official said.

In the past, the government has nudged state-run Life Insurance Corp of India to buy its assets when market interest is low, a model that could be replicated with EPFO, the official said.

Dattatreya said the fund could increase equity exposure to 15 per cent of annual investments over the next few years. At current investment rates, that would be about $2.5 billion a year.

Until now, EPFO's market exposure was limited to government and corporate bonds. It earned a return of 9.22 per cent on its investments last fiscal year, and paid 8.75 per cent to its subscribers.

A MISSED BULL-RUN

But with debt yields falling, returns are likely to be "much, much more moderate" this year, a senior EPFO official said.

Some market experts said EPFO has missed a bull-run in domestic stock markets and the decision to put a fraction of its funds in equities will not have much impact on returns or on the market.

India's NSE index has fallen nearly 12 per cent since a record high in March as slow progress on reforms and worries over retrospective taxes have spurred net foreign outflows.

"For any meaningful impact in the market and to get good returns, ideally EPFO should invest at least quarter of its funds for a duration of 10-15 years in active equity funds," said Gautam Sinha Roy, a fund manager at Mumbai-based Motilal Oswal Asset Management.

Defending the caution, Dattatreya said the government did not want to take much risk for workers.

"Trade unions have apprehensions. They need to have an open mind as we are making efforts in the interest of workers," he said.

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