India's textile sector, sapped by firm raw cotton prices at a time of soft demand for clothes exports, requires shareholder cash injections "across the board", Fitch Ratings has warned.

The ratings agency, which has implemented a series of downgrades to Indian textile companies since last autumn, warned that the industry's outlook remained "rather grim" as it grappled with the impact of global recession and firm raw material costs.

Meanwhile, long-term government loans taken out to fund previous factory expansion meant high levels of borrowing would "continue to plague the sector".

The ratings agency added: "The textile sector requires an infusion of equity across the board, given the relatively high financial leverage with which the sector has been operating for the past few years."

Shareholder cash support would become "critical" for reviving companies' credit ratings as they considered further rounds of factory investment.

Stocks tumble 

The warning comes amid a tightening in the raw cotton market, where global inventories are to fall by nearly 1m tonnes over the next year, according to a US government report, taking "their biggest hit in seven years".

"Tighter world stocks should help support world prices," the report said, forecasting a 10% rise in US cotton prices year on year.

Prices for benchmark October New York cotton stood at 57.87 cents a pound on Monday, up 44% from a March low despite a sharp correction over the past two trading days on fears that global economic revival might not be as sharp as some investors had hoped.

'Sub-normal monsoon'

The drop in inventories reflects fourth successive shortfall in global cotton production below demand.

Many farmers switched to crops viewed as more lucrative, while this year's weak Indian monsoon has raised the spectre of poor yields even though plantings have risen by 13%.

Fitch said that raw cotton prices were expected to remain "firm", adding that the "sub-normal monsoon could worsen the situation in the 2009-10 cotton season".

Indian textile groups affected by Fitch revisions include Century Textiles and Industries, to which the agency introduced a "negative" outlook on its AA- rating last month, and Sutlej Textiles, which it downgraded to BB- in February.