"I don’t think they are worth the paper - or the virtual paper - they are written on.
"Most of them do not take into account the role played by capital flows and the durability of those capital flows."
He was responding to an questions from the audience that a 'competitive' exchange rate close to 140 to the US dollar.
Mathai said when he was working in the US, standard models used showed that the US dollar was "substantially overvalued."
US authorities had responded by saying that because of "innovative financial markets" that created instruments like derivatives and collateralized credits and the demand for them meant that the dollar was at the "correct level."
"Now we saw in the financial crisis, what happened to the demand of that type of instruments," he explained, smiling.
"But maybe the last laugh is on us. Because even in the global financial crisis what happened to the dollar?
"It appreciated. Because there was as flight to quality to safety? Investors went from the very high risk US assets to the low risk US assets."
Sri Lanka's founder central bank chief John Exter, a US Federal Reserve official has explained through his 'golden pyramid' that when there is a banking crisis when, investors will fly to government securities, bank notes and gold.The desire to hold on to bank notes, a process known as private sector sterilization, sometimes worsened by bank runs can blunt the effect of monetary policy by increasing the real demand for cash and contracting credit.
Then exchange rates can appreciate (either against other exchange rates or commodities) and inflation can reverse as central bank policies lose effect (central bank impotence). Exter called the process a 'deflationary collapse'.
In the most recent global crisis, excess reserves (cash not given as credit by banks but deposited in the Fed) a process similar to private sector sterilization, rose dramatically in the US.
A common indicator to measure overvaluation is to compile a real effective exchange rate index (REER) which measures the differences in inflation between the rupee and a basket of currencies in trading partner countries.
According to the REER index compiled by Sri Lanka's central bank the rupees is now undervalued. From 103.51 in December the index is now at 96.27.
But like inflation and gross domestic product, REER indices could also be manipulated at will, by changing the basket, their weight or base years.
According to the latest series that is now published (base year 2010) the REER index was at 101.1 two years ago in July 2010. The rupee was apparently not overvalued, at least by this measure.
But in July 2010, when the base year was 2006, the index was at 123.63.
Meanwhile Mathai says that making a call on exchange rates is the task of traders but it was difficult to predict exchange rates.
"All that I am trying to say is predicting exchange rate is an impossible task," he explained.
"If a currency is 100 percent overvalued in some countries, ok may be you can make a qualitative assessment.
"But if you are saying that the rupee is at one level now and it should be five percent weaker or five percent stronger I think that is well within the statistical error bands."
One of the most farcical debates about exchange rate valuation relates to China. US nationalists are accusing China of 'undervaluing' its currency, in the same way they did to Japan in the 1970s and 1980s in a Mercantilist effort to cut the trade deficit.
The Japanese yen has appreciated from about 390 to the US dollar around the time of the break-up of the Bretton Woods to about 80 now and US trade deficit with Japan is still there.
According to IMF's last country report on China the Renminbi's real effective exchange rate index was about 120. Partly under US pressure, and partly to ward off inflation created by the Federal Reserve, China has been appreciating its currency from 2005.
However other measures including the country's current account behavior is used to point to undervaluation.
"Overall, the renminbi is assessed to be moderately undervalued against a broad basket of Currencies," the IMF's report concluded.
Since 2005 however, the Chinese currency has appreciated 30 percent against the US dollar.
