A World Bank study has virtually questioned the methodology of sovereign rating by the international agencies, saying there was evidence that Moody's such rating had low predictive power for currency crises.

The assessment assumes importance in the wake of Moody's warning to India that it would continue to have negative outlook on India's domestic currency rating due to high public deficit and the recent upgrading with stable outlook.

"There is evidence that Moody's sovereign rating have some (very low) predictive power for currency crises," it said in the World Bank's latest Economic Review.

A study by Carmen M Reinhart, a Professor of Economics in University of Maryland, had analysed sovereign credit ratings of Institutional Investors and Standard and Poor, apart from Moody's.

"Financial crises are generally difficult to predict and international interest rate spreads and currency forecasts also perform poorly in predicting such crises," the study said reasoning why sovereign ratings were "poor indicators" of currency crises.

Rating agencies had given much weight to debt-to-export ratios, which have proved to be poor predictors of financial stress, but they had given little to indicators of liquidity, currency misalignments and asset price behaviour, it said.

The empirical results of the study found that sovereign ratings "systematically" failed to predict currency crises, but did "considerably" better in predicting defaults.

"Even so, ratings will not have predicted the nearly certain defaults that would have occurred in several recent crises, had the international community not provided large-scale bailouts, " the World Bank study said.

About one-half of the currency crises were not associated with defaults, but an equal share of currency crises were linked in one way or another to a sovereign default incident, it said.

The study had a sample size of 113 defaults and 151 currency crises, of which 135 of them were in emerging market economies.

"A comparable exercise performed for the Moody's ratings shows an even greater gulf between emerging and developed economies," the study said.

It said there was no evidence of any connection between currency crashes and default in the developed economies.

However, "there is evidence that sovereign credit ratings tend to be reactive, particularly those for emerging market economies", it said, adding, "both the probability and the size of a downgrade are significantly greater for the emerging market economies."

"Currency crises often become credit crises as sovereign credit ratings collapse following the currency collapse and the economy loses access to international credit," it said.