India's wheat inventories at state warehouses have dropped to 19 million metric tons, the lowest in seven years, two government sources said on Friday, as two years of falling production forced state-run agencies to sell more grain to private players.

Last year, India, the world's second-biggest wheat producer, banned exports after output was curtailed due to a heat wave and overseas sales picked up as Russia's invasion of Ukraine sent global prices to multi-year highs.

While U.S. wheat prices have corrected more than 35% so far in 2023, prices in India have leapt more than 20% in the past few months, despite the ban.

That, according to trade and industry officials, is because this year's domestic wheat output is at least 10% less than the farm ministry's estimate of record production of 112.74 million metric tons.

Another indicator of low output is that the government has bought only 26.2 million metric tons of wheat from local farmers this year, compared with its target of 34.15 million tons.

But, despite the tight supply, the government has resisted calls to facilitate imports by either lowering or abolishing the current 40% tax or by directly buying from top suppliers such as Russia.

Instead, it has dipped into state reserves to sell wheat to bulk consumers, such as flour millers and biscuit makers, to cool domestic prices.

"Stocks are lower, but the government still has sufficient stocks to ensure that prices do not rise sharply. The government can still offload more wheat in the market if there's a requirement," said one of the sources.

"The government has adequate stocks until the next crops arrive in the market," the source said. The sources declined to be named as they are not authorised to speak to the media.

Farmers have sold their stocks and flour mills' inventories have depleted, traders said.

"Mills are buying from auctions conducted by the Food Corporation of India to run their operations. But this will soon force the government to sell more stocks to stabilize prices," said a Mumbai-based dealer with a global trade house.

And that, the deal said, will pull stocks below 6 million tons when the new marketing year starts on April 1, against the norm of a buffer of 7.46 million tons.

"To counter this, the government must initiate imports to secure enough stocks for market intervention. The correction in global prices presents a good opportunity to make purchases," he added.

Indian farmers are currently planting wheat, with the harvest to start by March.

Trade and industry officials believed higher prices would encourage farmers to plant more wheat, but planting is still lower than last year as dry weather conditions have sapped the soil of moisture and dragged down water levels at reservoirs.

The other threat that looms over the crop is that of any abnormal rise in temperatures during harvest time. (Reporting by Mayank Bhardwaj and Rajendra Jadhav; Editing by Savio D'Souza)