* BSE index down 0.42 pct; NSE index closes 0.63 pct lower
* Investors book profits in recent outperformers
* IT shares gain on value buying
By Indulal PM
MUMBAI, March 20 (Reuters) - Indian shares fell on Thursday, retreating further from record highs hit at the start of the week, on worries U.S. interest rates would rise sooner than expected and dent the appeal of higher-yielding emerging markets.
Recent outperforming blue chips such as ICICI Bank Ltd and ITC Ltd were among the leading losers after strong gains this month had sent the BSE and the NSE indexes to record highs on Tuesday.
Although India has largely been immune to global risk factors this month due to continued strong buying, earlier-than-expected U.S. rate hikes could reduce the appeal of emerging markets for funds overseas.
Short-term U.S. bond yields jumped by the most in almost three years on Wednesday after Federal Reserve Chair Janet Yellen said the central bank might end its bond-buying programme this fall, and could start to raise interest rates around six months later.
“The Fed has given indications that the rates could increase, and this will see FIIs (foreign institutional investors) cutting positions across emerging markets,” said Suresh Parmar, head of institutional equities at KJMC Capital Markets.
“And especially in India, where they have been pumping money in almost every session (in a month). We advise our clients to be cautious and selective,” he added. “Our markets are likely to trade range-bound in the medium term till elections.”
The benchmark BSE index fell 0.42 percent to 21,740.09, off its record high of 22,040.72 hit on Tuesday.
The broader NSE index closed 0.63 percent lower at 6,483.10, away from its record high of 6,574.95 touched on Tuesday.
Recent outperformers fell on profit-taking. Overseas funds have been integral to the rally this month, and any signs they may reverse their course could hit shares.
FIIs bought Indian shares worth 10.7 billion rupees ($175.40 million) on Wednesday, marking their 22nd buying session in the previous 23.
Banking stocks fell, with ICICI Bank ending 0.76 percent lower but still up 15 percent this month. State Bank of India ended down 1.81 percent after gaining 9.4 percent during the same period.
Investors also cashed in on recent outperformers such as infrastructure and capital goods stocks. BHEL closed 2.79 percent lower, while Larsen & Toubro ended down 2.16 percent.
Other blue chips also fell, including ITC which ended down 1.08 percent.
However, losses were limited as investors also picked up beaten down shares. Technology stocks gained sharply with the BSE IT index up 1.69 percent on value-buying after a recent slump. Tata Consultancy Services gained 3.37 percent, while Infosys closed 0.96 percent higher.
Among other gainers, Hindustan Unilever gained 1.95 percent, while Reliance Industries closed 0.33 percent higher, also on value-buying.
Healthcare stocks also gained with Cipla up 1.16 percent.
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FACTORS TO WATCH * Dollar pauses after Fed-led surge * Brent crude falls on U.S. rate rise expectations * Dollar upbeat on rate rise expectations, bonds fall * Foreign institutional investor flows * For closing rates of Indian ADRs
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Politics/General Asia Macro data (Reporting by Indulal PM; Editing by Subhranshu Sahu)