Dec 27 (Reuters) - Cotton prices in India are likely to edge higher on thin arrivals as farmers hold back their produce, though weak overseas demand and higher production are seen limiting the gains, said traders and exporters.

Cotton arrivals in India till Dec. 25 in the 2011/12 season fell by a quarter to 8.81 million bales of 170 kg each, compared with 11.79 million bales a year ago, the state-run Cotton Corp of India said on Tuesday.

Arrivals in Maharashtra, the second largest producer, nearly halved this year as against the corresponding period last year, the data showed.

"Supplies are not coming in full swing. Farmers have harvested cotton crop, but they are holding back the crop expecting the government will intervene in the market to raise the price," Dharmesh Lakhani, a trader and exporter at Rajkot in Gujarat.

The most active January cotton contract on the Multi Commodity Exchange provisionally ended up 0.85 percent at 16,580 rupees per bale.

On Monday, the most traded Shankar-6 variety rose 300 rupees to 34,000 rupees per candy of 356 kg each, showed data from the Cotton Association of India, a trade body.

In March, prices in India hit a record high of 61,700 rupees per candy, after global prices rose with adverse weather conditions in key growing areas disrupting supplies.

The prices in India are likely to fall substantially in the next two months as the biggest importer, China, cuts orders at a time when domestic supplies are set to peak.

"The upside is limited as exporters are witnessing slowdown in orders. They are buying cautiously. Last year, many exporters incurred losses," Lakhani said.

The government has estimated exports of nearly 8 million bales in the current cotton year, which began on Oct. 1, but some exporters feel the target is unlikely to be met.

The world's second biggest producer is likely to harvest 35.6 million bales in 2011/12 due to an expansion in acreage.