Fitch Ratings says that the recent partial lifting of the ban on cotton exports by the Indian government has created uncertainty over cotton prices and timing of cotton buying for domestic textile companies.
"The ban may provide temporary relief to domestic textile companies in the form of lower raw material prices, but the government's policy flip-flop will give rise to uncertainty over the direction of cotton prices over the long-term," says Tanu Sharma, associate director in Fitch's corporates team.
This uncertainty on cotton price movements could over the long term increase raw material price risk and inventory carrying risk for textile companies, which have been struggling to manage liquidity and working capital in a difficult operating environment.
The ban was initially imposed on 5 March 2012 to curb speculation and ensure domestic availability of cotton following a sudden surge in cotton exports to China in February 2012-March 2012 (See: India bans cotton exports).
The government then partly reversed its decision by allowing shipments of quantities that have already been registered and suspending fresh cotton exports indefinitely (See: Government lifts cotton export ban, but under conditions).
However, the offtake is slow in both domestic and export markets and cotton production is in surplus. Consequently, even before the ban was imposed, domestic cotton prices were hovering around the minimum support price levels (Rs33-34 per kg).