Cotton futures in India, the world's second-largest producer, are expected to rise this week on export demand and likely lower supplies as farmers hold back hoping for better prices, though estimates of higher output could restrict the upside.

Cotton supplies across India are around 150,000-160,000 bales of 170 kg each as against the expectation of 200,000 bales as production is expected at a record high, spot traders said. The state-run Cotton Advisory Board estimated India's cotton output at a record 37.5 million bales in the year.

Farmers have held back supplies on expectations of better prices and are selling only as per the requirement amid good export demand, traders said.

"Farmers have seen good prices, so they are not willing to sell at lower levels. If spot cotton prices fall below 38,000 rupees a candy, arrivals would fall sharply," said Manu Mangaldas Shah, a trader from Ahmedabad in Gujarat state.

In the spot market, the price of the most-traded domestic spot Shankar-6 variety fell 100 rupees to 38,900 rupees per candy of 356 kg, data from the Cotton Association of India showed. The January cotton contract ended 0.31 percent higher at 19,130 rupees per bale on the Multi Commodity Exchange.

"Higher prices (Indian cotton) will see export demand reduce sharply, as China is getting stocks at lower prices from the reserve sales," Kotak Commodities said in a research note.

China's purchases of domestic cotton for state reserves have exceeded 3.5 million tonnes midway through the 2013/2014 year after last week's buying of 475,800 tonnes, official statistics show. Stockpiling by the world's top cotton buyer is a driver of global prices of the fibre.