* USDA widely expected to cut U.S. inventories forecast

* Trading volumes heavy amid index fund roll

* Exchange stocks climb to highest since late July

NEW YORK, April 8 (Reuters) - Cotton futures rallied on Tuesday and recovered some of the previous day's sharp loss as buying ahead of Wednesday's monthly U.S. government supply and demand forecast offset pressure from the index fund roll.

The most-active May cotton contract on ICE Futures U.S. rallied 1.17 cents, or 1.3 percent, to settle at 91.79 cents a lb.

The second-month July contract closed up 1.24 cents, or 1.4 percent, at 92.41 cents a lb.

Trading remained rangebound, and volumes have picked up with the rolling of closely watched commodities index funds under way.

"We've been in the middle of a choppy, sideways affair. Traders are now trying to factor in what should be a fairly friendly report," said Jack Scoville, a vice president at Price Futures Group in Chicago.

The U.S. Agriculture Department is widely expected to cut its U.S. inventories forecast at the end of the 2013/14 crop year through July on lower-than-projected output in the world's top exporter after a March ginnings report.

Further, China's state sales slowed, easing merchant worries that robust demand for local fiber would crimp imports in the world's top textile market.

The state stockpiler sold about 39 percent of the fiber it put up for auction last week, according to information from the China Cotton Information Center compiled by Reuters.

Beijing is overhauling the controversial stockpiling policy it launched in 2011 that has driven voracious demand for foreign fiber and pegged a floor under the global market.

Exchange stocks rose slightly on Monday to about 265,900 bales, the most since the end of July, according to the most recent ICE data compiled by Reuters. (Reporting by Chris Prentice; Editing by Jonathan Oatis)