Feb 1 (Reuters) - Indian cotton prices are likely tread water near record high levels this week as lower-than-expected arrivals and a global rally are seen supporting the prices despite a slight fall in local demand, dealers said.

"Exporters and local textile units are buying, but arrivals are lower than trade expectations," said N.M. Sharma, managing director, Gujarat State Co-operative Cotton Federation Ltd.

Domestic cotton arrivals at spot markets till Jan. 30 in the 2010/11 season rose 6 percent on year to 19.5 million bales, the state-run Cotton Corp of India said.

India, the world's second-biggest producer, had permitted 5.5 million bales for exports from Oct. 1 but met with a poor response because rains hit harvest.

An initial deadline was extended until Feb. 25 for 1.7-1.9 million bales which went unshipped.

Overseas demand for Indian cotton has increased after bad weather hit crops in China and Pakistan, both leading consumers.

In India, the price of the most common Shankar-6 variety surged by 200 rupees to 49,000 rupees per candy of 356 kg each on Tuesday, data with the Cotton Association of India showed. The price hit a record high of 50,000 rupees on Jan. 28.

At 6:00 p.m., the New York cotton futures contract CTH1 was up 1.04 percent at $1.702 per lb.

India is likely to produce a record 32.9 million bales of cotton in 2010/11, topping last year's 29.5 million bales, a senior government official said last week.