The production of cotton, like other kharif crops, has been higher this time. A bigger crop is expected to bring down cotton prices further in the short term. However, much will depend on government policies and demand from China to determine whether prices get firm after Diwali.

"As per available estimates, the production this year is on the higher side. Against 340 lakh bales last year, we would probably see 370-380 lakh bales coming into the market this year,” said Ajitesh Mullick, assistant vice-president for retail research at Religare Commodities.

Most cotton growing regions of the country has received normal to higher rainfall this year, which has increased production not just of cotton, but all kharif crops. The rain also helped the sowing of rabi crops.

"While increased supply has brought in bearish sentiments in the market, demand from China too is expected to be lower this time,” he said.

Market reports said Chinese imports of cotton should drop by around 20 per cent this year. Chinese purchases were down 36 per cent between January and July to 810,311 tonnes compared with the same period in 2012, as per Chinese customs data. China, which holds around 60 per cent of global cotton stocks, is reportedly preparing to end its stockpiling programme to support its farmers.

Kapas prices in the Multi Commodity Exchange have dropped from Rs 1,100-Rs 1,150 per 20 kg level in December last year to around Rs 975. Increased production and lower exports are expected to bring down the price to Rs 940 or Rs 950 in the short term.

"In October, new arrivals start coming to the market. The market will wait for the prices to cool down. Usually demand picks up after Diwali. By the end of the year, prices generally remain firm while they remain subdued between January and April, when there is least activity in the market,” said Mullick. However, much depends on export policy. If the government eases restrictions on exports due to surplus production, prices may get firm.

Last week, a group of ministers (GoM) headed by agriculture minister Sharad Pawar rejected a textile ministry proposal to impose a 10 per cent duty on overseas sales of cotton beyond a declared exportable surplus.

The GoM found that as country’s cotton production has been increasing every year and there should be no restriction on export of raw cotton, as it would penalise farmers. The country consumes around 250 to 260 lakh bales of cotton, while over 100 tonnes is usually sold overseas. If the export demand picks up by Diwali, prices can get firm by mid-December.

"The price can move up to Rs 1,050 level, but getting back to last year’s Rs 1,150 level looks difficult,” said Mullick.