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Nominalized from the interrogative कथा(kathā, “how; whence; why”) (compare कथम्(katham)), from Proto-Indo-Iranian*kátʰaH(“in what way”), from a derivative of Proto-Indo-European*kʷós (compare similar formations: यथा(yathā) from *HyátʰaH(“in which way; as”) and तथा(tathā) from *tátʰaH(“in that way; so”)). The Sanskrit root is कथ्(kath).
Turner, Ralph Lilley (1969–1985) “kathā”, in A Comparative Dictionary of the Indo-Aryan Languages, London: Oxford University Press, page 135
Mayrhofer, Manfred (1992) Etymologisches Wörterbuch des Altindoarischen [Etymological Dictionary of Old Indo-Aryan] (in German), volume 1, Heidelberg: Carl Winter Universitätsverlag, page 295