India's persistently high inflation is weighing on its economic recovery and has constrained its sovereign rating, Moody's said.
It said food inflation is much higher than the global average and is a key contributor to India's overall inflation.
"Inflation remains high from a global standpoint, weighing down an otherwise promising economic recovery.
"Recurrent inflationary pressures have also constrained India's sovereign rating as they keep domestic capital costs high, erode domestic purchasing power as well as savings and lower international competitiveness," Moody's Investors Service said in a report.
WPI inflation in July stood at 5.19 per cent. Food inflation, which has over 14 per cent share in the WPI basket, was elevated at 8.43 per cent.
In absence of a significant increase in food output, the risk from continued inflation could limit India's growth prospects, Moody's said.
Moody's assigns a 'Baa3' rating on India, with a stable outlook.
It said that even as demand for food is rising, supply response has been weak due to poor irrigation and rural infrastructure, sub-optimal fertiliser use, and conversion of agricultural land to alternative uses.
"Inefficiencies in the government-directed food distribution system have exacerbated food supply constraints," it said, adding the authorities are yet to set out concrete plans to remove constraints supply.
"If the gap between food demand and supply does not narrow, food costs will keep mounting. And as growth picks up, the increasing cost of food could more quickly feed into rising wages, leading eventually to higher non-food inflation as well," it said.
