The correct distinction is the following:
Literary mood refers to the emotions that readers feel while grammatical mood refers to verb forms that express attitudes.
In this context, literary mood pertains to the overall atmosphere or emotional quality of a piece of literature, influencing how readers perceive and feel about the narrative or characters. In contrast, grammatical mood is a linguistic term that indicates the speaker’s attitude toward the action of the verb, such as indicative, imperative, or subjunctive moods.