Domestic cotton prices to remain under pressure in 2016-17, according to India Ratings and Research (Ind-Ra) report, due to continuation of Chinese direct subsidy-based policy and lower demand from spinning mills.

India Ratings and Research Senior Analyst Neermoy Shah said that it maintains a negative outlook on the cotton sector for the next fiscal. Though Bangladesh, Pakistan and Vietnam have replaced China with India as a supplier, volumes are picking up at a slow pace, and are unlikely to match Chinese demand

India produced 28.5 million bales during April-December 2015 as against 29.5 million bales in FY15 and 31 million bales in FY14 against which exports have been 5.3 million bales (4.2 million bales in FY15 and 9.3 million bales in FY 14).

In CY17 (CY refers to International Cotton Year, which commences from August and ends in July), the ratings agency expects cotton prices to stay firm.

Domestic prices had declined in CY16 in line with Ind-Ra's expectations and are expected to remain under pressure in CY17 as well.

Operating margins will stay in 1-2 per cent range for ginners and traders, but the profit after tax margins may improve as companies reduce stocks and focus on receivables management.

International cotton prices, however, will remain sensitive to the release of cotton by China from its cotton reserves, which Ind-Ra estimates to be around 59 per cent of global cotton stock at FY16.

Chinese cotton reserves will directly impact the quantum of imports in that country and consequently, global stock levels outside China, the report added.

The cotton industry is likely to revive moderately in CY17 as exports to Vietnam, Pakistan, and Bangladesh grow. Vietnam is likely to increase its spindles capacity by 30 per cent in FY17.

The local cotton production in Pakistan and Bangladesh is unable to keep pace with the increasing demand for apparels from these locations, providing opportunities to Indian exporters.

However, in view of China reducing imports significantly and moderating demand from the Indian spinning mills industry, Ind-Ra believes that the demand for cotton will increase at a marginal rate in CY17. Prices are unlikely to increase materially from the current levels, the report added.

The industry may also see rebound in domestic mill consumption driven by higher demand for Indian textiles and adequate domestic availability at stable cotton prices above minimum support prices, this can lead to a stable sector outlook.

According to Ind-Ra, a substantial increase in India's exports to China and other countries will result in the sector outlook being revised to stable.