With China continuing to decrease cotton yarn imports from India, demand for cotton from domestic spinning mills for producing yarn is set to decline, it is also low purchasing power that has led to fall in demand for cotton.

According to K Selvaraju of South Indian Mills Association (SIMA) there have been fall in demand since April 15-20%, due to that cotton prices have already declined by around Rs 500 per candy and are expected to decline by another Rs 1000-2000 per candy owing to poor demand from spinning mills.

China's cotton yarn off take has been poor at the same time exports to Europe have also come down. There is no liquidity among spinning mills which has led to fall in demand. This will lead to drop in cotton prices.

Spinning mills' holding capacity and purchasing power has been both crashed in recent times. Add to that, cotton prices increased "unnecessarily" by around Rs 1000-1500 per candy of 355 kg recently. Due to this, spinning mills are buying imported cotton, especially the Western African cotton since domestic cotton is costlier as per DK Nair, secretary general of Confederation of Indian Textile Industry (CITI).

This has led to decline in demand for domestic cotton which industry players anticipate will bring down cotton prices by Rs 1000-2000 per candy. Currently, while imported cotton costs around Rs 41000 per candy, domestic cotton is in the range of Rs 42,500-43000 per candy.

Till 2010-11, when cotton prices fluctuated a lot, spinning mills used to hold cotton inventory of 4-6 months. But having burnt their fingers, they now purchase cotton hand-to-mouth and do not stock much. Hence, with reduced cotton yarn exports to China and Europe coupled with liquidity issues, spinning mills have reduced purchase of cotton.

As per the Textile Commissioner's Office data, cotton yarn production increased by 5% during May 2014 at 332 million kg and by 5% during April- May 2014 at 662 million kg owing to better power supply.