KUALA LUMPUR/MUMBAI - The ousting of Malaysia's former prime minister Mahathir Mohamad, whose criticisms of India's policies in Kashmir damaged palm oil trade between the nations, has kindled hopes among Malaysian exporters for a rapid restoration of ties.

But political rhetoric alone will not restore full Malaysian palm oil flows to top market India any time soon, traders say: Palm prices within India are still too high relative to rival oils to encourage a sharp uptick in wholesale demand.

Malaysian supplies of palm oil to India have slowed to a trickle since Delhi adopted a hardline stance after Mahathir criticised actions in Kashmir in September. Exports to Malaysia's biggest customer for the last five years plunged 91% in February to 29,269 tonnes from a year earlier, according to Refinitiv assessments. 

In sign of how important it is to Malaysia to restore ties, within hours of the installation of a new prime minister on Sunday a senior lawmaker expected to be in the new cabinet called for a "renegotiation" of relations with India. 

Malaysian industry players welcomed the move, but Indian traders said prices must also fall further due to palm oil's relatively narrow price spread with rival oils. 

The soybean-palm oil spread in India averaged 3,929 Indian rupees ($53.42) a tonne from January through February, compared with 13,150 rupees ($178.79) a year ago, according to Solvent Extractors Association (SEA) of India data.

"The narrow gap between soft oils and palm oil has been encouraging refiners to buy more soyoil and sunflower oil than normal," said B.V. Mehta, SEA executive director. "A spread of less than $100 per tonne between palm oil and soft oil always makes imports of soft oil attractive for Indian refiners."

India's palm oil imports in the first quarter of the 2019/20 marketing year, which started on Nov. 1, fell 14% from a year ago to 2 million tonnes, while combined imports of soyoil and sunflower oil jumped 26% to 1.36 million tonnes, SEA data showed.

The Malaysian Palm Oil Association - a group representing growers - is prioritising diplomatic efforts to woo India, chief executive Nageeb Wahab said.

However, Delhi will need to its soften its stance on Malaysia and the price differential between palm oil and soyoil will need to widen to get Indian buyers on board, Sathia Varqa, co-founder of Singapore-based Palm Oil Analytics said.

Malaysia's benchmark palm oil futures have dropped more than 20% since the start of 2020 to 2,478 ringgit ($594.96) on Thursday, retracting to November levels, as top buyers India and China slow purchases amid the coronavirus epidemic. 

($1 = 4.1820 ringgit) ($1 = 73.5500 Indian rupees)

($1 = 4.1650 ringgit)

(Reporting by Mei Mei Chu in Kuala Lumpur and Rajendra Jadhav in Mumbai; Editing by Gavin Maguire and Kenneth Maxwell) ((meifong.chu@thomsonreuters.com; +603-2333-8035; Reuters Messaging: @meixchu on Twitter))