Cotton prices are expected to remain moderately firm in the near term. However, profit booking at higher levels is likely to keep prices under check. However, if the US dollar gets stronger against the rupee, there could be good export demand for cotton. This can also firm up domestic price, according to Mullick, assistant vice-president for retail research at Religare Commodities.

On Friday, cotton ticked higher, with farmers holding on stocks for better price, supported by a weaker dollar, however this was its biggest monthly loss since June on expectations of growing supply and tepid demand going forward.

Cotton prices have been sliding since June last year. In May, kapas prices in the futures market were around Rs 1,100 per 20 kg lot. Similar to other kharif crops, a bearish trend has been prevailing on the cotton counter due to good monsoons.

Reports about better sowing activity started pulling down prices in June. Gujarat reported 10 per cent rise in sowing and all the other cotton-producing states also got better rainfall compared with 2012-13. In August, the price was at Rs 950. Short covering saw price rise briefly to Rs 1,070 level, but by November, it came down to a low of Rs 905 in the futures market.

Usually arrivals start by October and the market will wait for the prices to further cool down. The demand being low during November, the price came down to Rs 905 level. Usually cotton demand picks up after Diwali, said Mullick.

As per November estimates of the Cotton Association of India, the country produced 38.5 million bales (a bale is 170 kg) of cotton in 2013-14 compared with 35.67 million bales in 2012-13. India consumes around 25 to 26 million bales of cotton, while the remaining stock is usually exported.

In the past few weeks, there have been reports about demand picking up in both domestic as well as export markets. According to market watchers, exporters have started receiving orders from China. However, there have been also reports about the Chinese government planning to end its cotton stockpiling. Much will depend on the policy decision of the Chinese government, as that country is a major importer of Indian cotton.

Further, arrivals came down in December after a fall in price in November as farmers held back their stocks expecting the price to rebound.

In the past few days, cotton price has bounced back from the November low. NCDEX kapas April contract quoted around Rs 1,020 last week. Kapas has support at Rs 950 and resistance of Rs 1,050.