High inflation hampering India’s economic recovery: Moody’s

India's persistent high inflation is hampering the country's economic recovery and constraining its sovereign rating, Moody's Investor Service Inc said in a note on Wednesday.

India is rated Baa3 with a stable outlook by Moody's.

The report said India ''is poised for acceleration in GDP growth, based on expected policy reforms and robust investor sentiment. However, inflation remains high from a global standpoint, weighing down an otherwise promising economic recovery.''

It pointed out that recurrent inflationary pressures keep domestic capital costs high, erode domestic purchasing power as well as savings and lower international competitiveness, thus constraining India's sovereign rating.

Increase in food prices has been exerting pressure on overall inflation which is likely to worsen in the next few months as inadequate rainfall impacts agricultural production.

Retail inflation, or inflation based on the consumer price index (CPI), rose to 7.96 per cent in July from 7.46 per cent in June. This is expected to pose a challenge to the new Narendra Modi-led government as it attempts to revive the economy.

Economic recovery has been gradual after India grew below 5 per cent for two consecutive years. India is expected to grow 5.4-5.8 per cent in the current fiscal year.

The report authored by Atsi Seth, senior vice-president at the ratings firm, points out that though the new government has taken a number of short-term measures to check inflation, it may not be enough in the absence of long-term measures.

''Indian authorities recognize that the current recovery will be difficult to sustain if inflation persists. They have announced several measures to curtail food price pressures. These include greater food-price monitoring by state governments, a stabilization fund to lower market prices, and harsher penalties for hoarders.

''While these policies may alleviate the food-price spikes stemming from lower food output due to this year's relatively weak monsoon, they do not address the long-term widening of the gap between food demand and supply,'' she said.

The report warns that the risks of inflation becoming more broad-based are high as growth accelerates.

It points out that high food prices will feed into rising wages as growth picks up, leading eventually to higher non-food inflation as well.