* ITC shares hit on regulatory worries
* IDFC gains on higher earnings
By Manoj Dharra and Abhishek Vishnoi
MUMBAI, Aug 16 (Reuters) - Indian shares fell on Thursday, as investors booked profits on banks after paring back expectations for rate cuts, while ITC dropped after Australia's call for tough regulations on the tobacco industry raised worries of a crackdown at home.
The falls in the broader indexes reverse two sessions of mild gains -- with the BSE index ending on Tuesday at a five-month closing high -- as stock investors re-think prior bets the Reserve Bank of India would cut interest rates at its mid-September policy review.
Those hopes had been sparked by data on Tuesday showing headline inflation unexpectedly fell, but analysts warned the decline was likely temporary, while the rise in core inflation could prevent any monetary easing in the near term.
The falls came even after index compiler MSCI increased India's weighting in its Emerging Market Index to 6.40 percent from 6.33 percent, as per its August index review on Wednesday.
"Inflation data has come down, but core inflation still remains high. So there is still some thought of discomfort as to whether this lower over-all inflation number would percolate in rate cut," Kaushik Dani, a fund manager at Peerless Mutual fund.
India's BSE index fell 0.4 percent to 17,657.21 points after posting its highest close since March 14 on Tuesday.
The 50-share NSE index declined 0.32 percent to 5,380.35 points.
Domestic markets were closed on Wednesday for a public holiday.
ITC shares fell 3.5 percent, posting their biggest fall since May 8, on fears about regulatory action at home after Australia called on the world to match its tough new anti-tobacco marketing laws that will ban logos on cigarette packs.
Banking shares pared their previous sessions gains, with the NSE Bank index down 0.9 percent versus Tuesdays gains of 1.13 percent.
ICICI Bank shares fell 1.4 percent after gaining 2.2 percent on Tuesday.
Shares in Infrastructure Development Finance Co Ltd gained 4.25 percent after the lender for infrastructure projects reported late on Tuesday a 21.02 percent growth in April-June net profit..
Reliance Industries gained 2.1 percent after Goldman Sachs said in a note the energy conglomerate could potentially become a $100 billion stock by fiscal 2017 from its current market capitalisation of around $46.6 billion.
To accomplish that, Goldman said Reliance needs to get government approvals on investments and gas prices, restrict its focus to core businesses, and return some of its surplus cash in the form of dividends or buybacks, among other measures.
Shares impacted by MSCI's quarterly review were also impacted.
Housing Development Finance Corp's rose 1.04 percent after the index compiler raised the weighting of the home loan provider in the MSCI India index by 120 basis points to 7.4 percent.
Meanwhile Infosys fell 0.6 percent, while Tata Consultancy Services fell 0.4 percent, after MSCI slightly reduced their weightings.
FACTORS TO WATCH * Dollar at 1-month high vs yen on rising U.S. yields
* Oil steady near 3-month highs on supply worries
* Shares, euro edge lower, await for stimulus clues * Foreign institutional investor flows * For closing rates of Indian ADRs
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