MUMBAI (Reuters) — India may start releasing cotton from government reserves in the first week of February, a source with knowledge of the matter told Reuters, as warehouses in parts of the world’s second-largest producer bulge with the fibre.

Traders are worried India may come out to sell its stockpiles, further pressuring prices just after top consumer China’s decision to cut imports added to an oversupplied market.

ICE cotton fell to its lowest level in nearly 5-1/2 years on Thursday pressured by a strong U.S. dollar and declines in other commodities markets.

Spot cotton prices in India have fallen 10 percent to about 30,200 rupees ($491) per candy of 356 kg since the beginning of the crop season that started in October, hit by China’s higher output and cuts in purchases. (caionline.in/spot_rates.asp)

State-owned Cotton Corp of India (CCI) has bought about 5 million bales (170 kg each) of cotton so far from the current crop and is expected to release the stockpiles in phases through electronic auctions.

It is likely to first use stocks from southern states, where CCI has fewer warehouses and storage space is tighter than in other parts of the country, traders said.

CCI is waiting to see if prices recover before opening any auction, said the source, who did not want to be named as he is not authorised to talk to media.

CCI’s Chairman and Managing Director B.K. Mishra did not respond to phone calls or messages seeking comment.

A trader said CCI could be looking for falling domestic supplies to support or lift local prices.

Daily arrivals across India have dropped to 175,000-185,000 bales (of 170 kg each) a day, from 200,000-252,000 bales a day about a week ago.

“A drop in local supply should give some support to prices now,” said Arun Dalal, a trader in the city of Ahmedabad in India’s top cotton producing state of Gujarat.

India is expected to buy 8 million to 10 million bales in the 2014/15 crop season from farmers, compared with a record of 9 million bales in the 2008/09 season.

India’s output could hit a record 40 million bales this season, according to the country’s Cotton Advisory Board.

That threatens to add to the global glut that China helped to create by scaling back its stockpiling scheme, which had earlier soaked up much of the excess in international markets.

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