MUMBAI (Reuters) - The BSE Sensex fell on Thursday, as investors pared back expectations for rate cuts because of high oil prices, 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 their highest close since mid-March -- as Brent crude futures remained at near three-month highs.
High oil prices could reduce bets the Reserve Bank of India would cut interest rates at its mid-September policy review, with hopes momentarily rising after data on Tuesday showed headline inflation unexpectedly fell.
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.
The BSE Sensex fell 0.4 percent to 17,657.21 points after posting its highest close since March 14 on Tuesday.
The Nifty declined 0.32 percent to 5,380.35 points.
Domestic markets were closed on Wednesday for a public holiday.
ITC (ITC.NS) 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 (ICBK.NS) shares fell 1.4 percent after gaining 2.2 percent on Tuesday.
Shares in Infrastructure Development Finance Co Ltd (IDFC.NS) 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 (RELI.NS) 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 (HDFC.NS) 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 (INFY.NS) fell 0.6 percent, while Tata Consultancy Services fell 0.4 percent, after MSCI slightly reduced their weightings.