India's high food inflation is a negative for the country's sovereign ratings as it filters through the broader economy, with adverse consequences for growth and the large fiscal and current account deficits, Moody's said on Monday.
Moody's Investors Service is the only one of the three major credit agencies to rate India with a "stable" outlook. Fitch Ratings and Standard and Poor's Ratings Services downgraded their outlook on India to "negative" from "stable" last year.
Higher food prices can accelerate broader inflation by pushing up wages, while negatively impacting the government finances and reducing monetary policy flexibility, Moody's said in a report.
The report comes after S&P last week said the slowdown in domestic economic growth is less supportive for India's sovereign ratings.
"Sustained food inflation is credit negative because it exacerbates India's macroeconomic challenges of slowing growth, high inflation and large fiscal and current account deficits," Moody's said.
India last week said consumer price inflation rose 10.9 percent in February, accelerating slightly from January, while wholesale price inflation rose 6.84 percent from a year earlier.
Although food inflation slowed down to 11.38 percent last month from 11.88 percent in January, it stayed in double-digits for the third straight month, tempering expectations of any aggressive monetary easing.
Moody's estimates food accounts for more than 50 percent of the average household spending in India, a worry for an economy that relies largely on private consumption.
Sustained food inflation over several quarters also has the potential to push up wages, reducing the extent through which the central bank can lower interest rates, while reducing the competitiveness of exports and import-competing sectors.
Food inflation also worsens the country's budget deficit given the government subsidises prices for a large portion of the population, Moody's added.
Increasing food supply could be a solution, but India is constrained by poor rural infrastructure, inefficient food distribution and storage systems and by agricultural productivity, Moody's also warned.