A baby girl, born to poor parents at a rural hamlet in the district, was allegedly sold to a childless couple in Tamil Nadu.
A case has been registered against the child's parents and paternal grandmother, police said.
The grandmother has been taken into custody while the father is still absconding, they said.
The child was the fifth of the impoverished couple.
According to police, the woman, who gave birth on December 25, alleged that the infant was taken away byher husband and mother-in-law four days later and given to the couple from Pollachi.
The incident came to light after neighbours asked the mother about the child and later informed 'Thanal', an NGO and police.
The Kerala State Council for Child Welfare has sought a comprehensive probe into the alleged sale of the newborn.
A police official said a police team had gone to Pollachi as per the woman's statement, but could not trace the child.
They have now proceeded to Erode in Tamil Nadu with the grandmother in search of the baby.
Meanwhile, the National Human Rights Commission has taken suo motu cognisance of media reports with regard to the development and issued notices to the Chief Secretaries and DGPs of Kerala and Tamil Nadu.
The Commission in a statement said sale and purchase of the infant, as reported in this case, was "truly violation" of human rights and the statutory provisions on adoption.
Such illegal practices cannot be allowed in a civilized society, it said.
Notice has also been issued to the Secretary, Union Ministry of Women and Child Development seeking a report on the matter, especially on the monitoring mechanism in place at the Central Adoption Resource Authority for Protection of Children/Infants against the misuse of adoption laws.
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